An exact and explicit formula for pricing lookback options with regime switching | Zendy

Leunglung Chan | Zendy; SongPing Zhu | Zendy

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An exact and explicit formula for pricing lookback options with regime switching

Author(s) -

Leunglung Chan,

SongPing Zhu

Publication year - 2021

Publication title -

journal of industrial and management optimization

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.325

H-Index - 32

eISSN - 1553-166X

pISSN - 1547-5816

DOI - 10.3934/jimo.2021203

Subject(s) - markov chain , geometric brownian motion , volatility (finance) , markov process , mathematical economics , brownian motion , asset (computer security) , economics , econometrics , financial economics , mathematics , computer science , diffusion process , statistics , economy , computer security , service (business)

This paper investigates the pricing of European-style lookback options when the price dynamics of the underlying risky asset are assumed to follow a Markov-modulated Geometric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on states of the economy described by a continuous-time Markov chain process. We derive an exact, explicit and closed-form solution for European-style lookback options in a two-state regime switching model.

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