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Continuous-Time Markov Chain and Regime Switching Approximations with Applications to Options Pricing

  • Zhenyu Cui
  • J. Lars Kirkby
  • Duy NguyenEmail author
Chapter
Part of the The IMA Volumes in Mathematics and its Applications book series (IMA, volume 164)

Abstract

In this chapter, we present recent developments in using the tools of continuous-time Markov chains for the valuation of European and path-dependent financial derivatives. We also survey results on a newly proposed regime switching approximation to stochastic volatility, and stochastic local volatility models. The presented framework is part of an exciting recent stream of literature on numerical option pricing, and offers a new perspective that combines the theory of diffusion processes, Markov chains, and Fourier techniques. It is also elegantly connected to partial differential equation (PDE) approaches.

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© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.School of BusinessStevens Institute of TechnologyHobokenUSA
  2. 2.School of Industrial and Systems EngineeringGeorgia Institute of TechnologyAtlantaUSA
  3. 3.Department of MathematicsMarist CollegePoughkeepsieUSA

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