Option pricing in a regime-switching model using the fast Fourier transform (Q937475)
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scientific article; zbMATH DE number 5312403
| Language | Label | Description | Also known as |
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| English | Option pricing in a regime-switching model using the fast Fourier transform |
scientific article; zbMATH DE number 5312403 |
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Option pricing in a regime-switching model using the fast Fourier transform (English)
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15 August 2008
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Summary: This paper is concerned with fast Fourier transform (FFT) approach to option valuation, where the underlying asset price is governed by a regime-switching geometric Brownian motion. An FFT method for the regime-switching model is developed first. Aiming at reducing computational complexity, a near-optimal FFT scheme is proposed when the modulating Markov chain has a large state space. To test the FFT method, a novel semi-Monte Carlo simulation algorithm is developed. This method takes advantage of the observation that the option value for a given sample path of the underlying Markov chain can be calculated using the Black-Scholes formula. Finally, numerical results are reported.
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