An Analytic Valuation Method for Multivariate Contingent Claims with Stochastic Volatility
نویسندگان
چکیده
In this paper, we provide an analytic valuation method for European-type contingent claims with multiple underlying assets under a stochastic market environment. We employ a twostate Markov regime-switching volatility in order to reflect the stochastically-changing market environment. The method is developed by exploiting the probability densities of the occupation times for which the underlying asset processes are in a certain regime during a time period. By using the method, we provide closed-form valuation formulas for exchange options with two underlying assets. In addition, in order to exploit the method for valuing contingent claims with more than two underlying assets, we develop an approximation formula which can be applied to a wide range of financial contingent claims with multiple underlying assets.
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