Option Pricing with Regime Switching Lvy Processes using Fourier Space Time Stepping

K.R. Jackson, S. Jaimungal, and V. Surkov (Canada)


Option Pricing, L´evy Processes, Regime Switching, Fourier Methods, American Options, Catastrophe Options.


Although jump-diffusion and L´evy models have been widely used in industry, the resulting pricing partial-integro differential equations poses various difficulties for valu ation. Diverse finite-difference schemes for solving the problem have been introduced in the literature. Invari ably, the integral and diffusive terms are treated asymmet rically, large jumps are truncated and the methods are diffi cult to extend to higher dimensions. We present a new effi cient transform approach for regime-switching L´evy mod els which is applicable to a wide class of path-dependent options (such as Bermudan, barrier, and shout options) and options on multiple assets.

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