Closed-Form Formula for the Conditional Moment-Generating Function Under a Regime-Switching, Nonlinear Drift CEV Process, with Applications to Option Pricing
Kittisak Chumpong,
Khamron Mekchay,
Fukiat Nualsri
et al.
Abstract:An analytical derivation of the conditional moment-generating function (MGF) for a regime-switching nonlinear drift constant elasticity of variance process is established. The proposed model incorporates both regime-switching mechanisms and nonlinear drift components to better capture market phenomena such as volatility smiles and leverage effects. Regime-switching models can match the tendency of financial markets to often change their behavior abruptly and the phenomenon that the new behavior of financial va… Show more
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