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Option pricing under a Markov-modulated jump-diffusion dividend
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  • Yuanchuang Shan,
  • Haoran Yi,
  • Xuekang Zhang,
  • HuiSheng Shu
Yuanchuang Shan
Donghua University
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Haoran Yi
Donghua University
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Xuekang Zhang
Anhui Polytechnic University
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HuiSheng Shu
Donghua University
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Abstract

This paper investigates the European option valuation under the condition that the dividend payments follow a Markov-modulated Merton jump-diffusion model. We consider the dividend discount model under real probability measure, the stock price process is then deduced. The regime switching Esscher transform is employed to determine a risk-neutral measure. Finally, we obtain the closed form solution of European option when the dividend announcement time and the dividend payment time are consistent or inconsistent.