Journal of Korean Institute of Industrial Engineers (대한산업공학회지)

Korean Institute of Industrial Engineers (대한산업공학회)
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Calibrated Parameters with Consistency for Option Pricing in the Two-state Regime Switching Black-Scholes Model

국면전환 블랙-숄즈 모형에서 정합성을 가진 모수의 추정

  • 한규식 (전북대학교 상과대학 경영학부)
  • Received : 2010.02.18
  • Accepted : 2010.05.14
  • Published : 2010.06.01
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Abstract

Among a variety of asset dynamics models in order to explain the common properties of financial underlying assets, parametric models are meaningful when their parameters are set reliably. There are two main methods from which we can obtain them. They are to use time-series data of an underlying price or the market option prices of the underlying at one time. Based on the Girsanov theorem, in the pure diffusion models, the parameters calibrated from the option prices should be partially equivalent to those from time-series underling prices. We call this phenomenon model consistency. In this paper, we verify that the two-state regime switching Black-Scholes model is superior in the sense of model consistency, comparing with two popular conventional models, the Black-Scholes model and Heston model.

Keywords

References

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