Analysis of Pricing Financial Derivatives Under Regime-switching Economy
Author | : Farzad Alavi Fard |
Publisher | : |
Total Pages | : 113 |
Release | : 2014 |
ISBN-10 | : OCLC:925486878 |
ISBN-13 | : |
Rating | : 4/5 (78 Downloads) |
Download or read book Analysis of Pricing Financial Derivatives Under Regime-switching Economy written by Farzad Alavi Fard and published by . This book was released on 2014 with total page 113 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis we argue that regime-switching models can significantly improve the pricing models for financial derivatives. We use three examples to analyse the valuation of derivative contracts under the Markovian regime-switching framework, namely, 1) a European call option, 2) a Ruin Contingent Life Annuity, and 3) a participating product. Such a regime-switching framework unveils a potent class of models. Throughout the modulation of the model parameters by a Markov chain, they can simultaneously explain the asymmetic leptokurtic features of the returns' distribution, as well as the volatility smile and the volatility clustering effect. The intuition behind regime-switching models is to capture the appealing idea that the macro-economy is subjected to regular, yet unpredictable in time, states, which in turn affects the prices of financial securities.