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Zbl 1107.91325
Buffington, John; Elliott, Robert J.
American options with regime switching. (English)
[J] Int. J. Theor. Appl. Finance 5, No. 5, 497-514 (2002). ISSN 0219-0249

Summary: A Black--Scholes market is considered in which the underlying economy, as modeled by the parameters and volatility of the processes, switches between a finite number of states. The switching is modeled by a hidden Markov chain. European options are priced and a Black--Scholes equation obtained. The approximate valuation of American options due to Barone--Adesi and Whaley is extended to this setting.
MSC 2000:
*91B28 Finance etc.

Keywords: option pricing; free boundary problem; Black-Scholes equation

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