Option pricing under regime-switching models: Novel approaches removing path-dependence

Godin, Frédéric; Lai, Van Son; Trottier, Denis-Alexandre

doi:10.1016/j.insmatheco.2019.04.006

Cited by 14 publications

(2 citation statements)

References 55 publications

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“…To compute the risk-neutral price of Φ, the approach used follows the work of Godin et al (2019) (see Section 5.3 of the latter paper). Let H ≡ {H n } N n=0 be the filtration generated by the regimes and G be the filtration containing all latent factors and all market information available to financial participants, i.e.…”

Section: A Pseudo-codementioning

confidence: 99%

Deep equal risk pricing of financial derivatives with non-translation invariant risk measures

Carbonneau¹,

Godin²

2021

Preprint

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The use of non-translation invariant risk measures within the equal risk pricing (ERP) methodology for the valuation of financial derivatives is investigated. The ability to move beyond the class of convex risk measures considered in several prior studies provides more flexibility within the pricing scheme. In particular, suitable choices for the risk measure embedded in the ERP framework such as the semi-mean-square-error (SMSE) are shown herein to alleviate the price inflation phenomenon observed under Tail Value-at-Risk based ERP as documented for instance in Carbonneau and Godin (2021b). The numerical implementation of non-translation invariant ERP is performed through deep reinforcement learning, where a slight modification is applied to the conventional deep hedging training algorithm (see Buehler et al., 2019) so as to enable obtaining a price through a single training run for the two neural networks associated with the respective long and short hedging strategies. The accuracy of the neural network training procedure is shown in simulation experiments not to be materially impacted by such modification of the training algorithm.

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Section: A Pseudo-codementioning

confidence: 99%

Deep equal risk pricing of financial derivatives with non-translation invariant risk measures

Carbonneau¹,

Godin²

2021

Preprint

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“…Moreover Tour et al [22] also proposed a spectral element method for pricing different type of options under regime‐switching with jumps. Godin et al [8] developed novel approached for pricing options under regime‐switching models.…”

Section: Introductionmentioning

confidence: 99%

Partial differential integral equation model for pricing American option under multi state regime switching with jumps

Yousuf

2021

Numerical Methods Partial

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In this paper, we consider a two dimensional partial differential integral equation (PDIE) model for pricing American option. A nonlinear rationality parameter function for two asset problems is introduced to deal with the free boundary. The rationality parameter function is added in the PDIEs used for pricing American option problems under multi-state regime switching with jumps. The resulting two dimensional nonlinear system of PDIE is then numerically solved. Based on real poles rational approximation, a strongly stable highly efficient and reliable method is developed to solve such complicated systems of PIDEs. The method is build in a predictor corrector style which makes it linearly implicit, therefore, avoids solving nonlinear systems of equations at each time step in all regimes. The method is seen to maintain the stability and convergence for large jump sizes and high volatility in each regime. The impact of regime switching on option prices corresponding to different values interest rate, volatility, and rationality parameter is computed, illustrated by graphs and given in the tables. Convergence results in each regime are presented and time evolution graphs are given to show the effectiveness and reliability of the method.

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A Spectral Element Method for Option Pricing Under Regime-Switching with Jumps

Tour

Thakoor

et al. 2020

J Sci Comput

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Option pricing under regime-switching models: Novel approaches removing path-dependence

Cited by 14 publications

References 55 publications

Deep equal risk pricing of financial derivatives with non-translation invariant risk measures

Deep equal risk pricing of financial derivatives with non-translation invariant risk measures

Partial differential integral equation model for pricing American option under multi state regime switching with jumps

A Spectral Element Method for Option Pricing Under Regime-Switching with Jumps

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