Option Pricing Under the Markov-switching Framework Defined by Three States

An exact solution for the valuation of the options of the European style can be obtained using the Black-Scholes model. However, some of the limitations of the Black-Scholes model are said to be inconsistent such as the constant volatility of the stock price which is not the case in real life. In th...

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Bibliographic Details
Main Authors:	Castoe, Minna, Raspudic, Teo
Format:	Others
Language:	English
Published:	Mälardalens högskola, Akademin för utbildning, kultur och kommunikation 2020
Subjects:	Option pricing Markov-switching framework Markov chain Stochastic volatility Monte carlo simulation Mathematics Matematik
Online Access:	http://urn.kb.se/resolve?urn=urn:nbn:se:mdh:diva-48808

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spelling	ndltd-UPSALLA1-oai-DiVA.org-mdh-488082020-06-24T03:32:31ZOption Pricing Under the Markov-switching Framework Defined by Three StatesengCastoe, MinnaRaspudic, TeoMälardalens högskola, Akademin för utbildning, kultur och kommunikationMälardalens högskola, Akademin för utbildning, kultur och kommunikation2020Option pricingMarkov-switching frameworkMarkov chainStochastic volatility Monte carlo simulationMathematicsMatematikAn exact solution for the valuation of the options of the European style can be obtained using the Black-Scholes model. However, some of the limitations of the Black-Scholes model are said to be inconsistent such as the constant volatility of the stock price which is not the case in real life. In this thesis, the Black-Scholes model is extended to a model where the volatility is fully stochastic and changing over time, modelled by Markov chain with three states - high, medium and low. Under this model, we price options of both types, European and American, using Monte Carlo simulation. Student thesisinfo:eu-repo/semantics/bachelorThesistexthttp://urn.kb.se/resolve?urn=urn:nbn:se:mdh:diva-48808application/pdfinfo:eu-repo/semantics/openAccess
collection	NDLTD
language	English
format	Others
sources	NDLTD
topic	Option pricing Markov-switching framework Markov chain Stochastic volatility Monte carlo simulation Mathematics Matematik
spellingShingle	Option pricing Markov-switching framework Markov chain Stochastic volatility Monte carlo simulation Mathematics Matematik Castoe, Minna Raspudic, Teo Option Pricing Under the Markov-switching Framework Defined by Three States
description	An exact solution for the valuation of the options of the European style can be obtained using the Black-Scholes model. However, some of the limitations of the Black-Scholes model are said to be inconsistent such as the constant volatility of the stock price which is not the case in real life. In this thesis, the Black-Scholes model is extended to a model where the volatility is fully stochastic and changing over time, modelled by Markov chain with three states - high, medium and low. Under this model, we price options of both types, European and American, using Monte Carlo simulation.
author	Castoe, Minna Raspudic, Teo
author_facet	Castoe, Minna Raspudic, Teo
author_sort	Castoe, Minna
title	Option Pricing Under the Markov-switching Framework Defined by Three States
title_short	Option Pricing Under the Markov-switching Framework Defined by Three States
title_full	Option Pricing Under the Markov-switching Framework Defined by Three States
title_fullStr	Option Pricing Under the Markov-switching Framework Defined by Three States
title_full_unstemmed	Option Pricing Under the Markov-switching Framework Defined by Three States
title_sort	option pricing under the markov-switching framework defined by three states
publisher	Mälardalens högskola, Akademin för utbildning, kultur och kommunikation
publishDate	2020
url	http://urn.kb.se/resolve?urn=urn:nbn:se:mdh:diva-48808
work_keys_str_mv	AT castoeminna optionpricingunderthemarkovswitchingframeworkdefinedbythreestates AT raspudicteo optionpricingunderthemarkovswitchingframeworkdefinedbythreestates
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Option Pricing Under the Markov-switching Framework Defined by Three States

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