Option Pricing With Markov-Modulated Dynamics

@article{Jobert2006OptionPW,
  title={Option Pricing With Markov-Modulated Dynamics},
  author={A. Jobert and L. C. G. Rogers},
  journal={SIAM J. Control and Optimization},
  year={2006},
  volume={44},
  pages={2063-2078}
}
Markov-modulated models for equity prices have recently been extensively studied in the literature. In this paper, we apply some old results on the Wiener–Hopf factorization of Markov processes to a range of option-pricing problems for such models. The first example is the perpetual American put, where the exact (numerical) solution is obtained without discretizing any PDE. We then show how the methodology of Rogers and Stapleton [Finance Stoch., 2 (1997), pp. 3–17] can be used to tackle finite… CONTINUE READING

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