On pricing double-barrier options with Markov regime switching

Abstract

We propose an efficient method for valuation of double-barrier options in a Markov regime switching diffusion model. This model incorporates three factors: Structural changes in economic conditions, business and investment environments into the diffusion process, and capturing some important properties of asset returns such as asymmetry and heavy tails. Under a such framework, we provide the closed-form upper and lower bounds of double-barrier options using Fourier series expansion. Furthermore, the bounds can also be systemically improved to get higher accuracy. In addition, we carry out extensive numerical experiments, and the results show that the solution we derive is tight.