This work will present an option pricing model that accommodates parameters that vary over time, whilst still retaining a closed-form expression for option prices: the Hidden Markov Option Pricing Model. This is possible due to the macro-structure of this model and provides the added advantage of ensuring efficient computation of option prices. This model turns out to be a very natural extension to the Black-Scholes model, allowing for time-varying input parameters.
Reference:
Anderson, M. 2006. Option pricing using hidden Markov models. University of Cape Town.
Anderson, M. (2006). Option pricing using hidden Markov models. (Thesis). University of Cape Town ,Faculty of Science ,Department of Statistical Sciences. Retrieved from http://hdl.handle.net/11427/10045
Anderson, Michael. "Option pricing using hidden Markov models." Thesis., University of Cape Town ,Faculty of Science ,Department of Statistical Sciences, 2006. http://hdl.handle.net/11427/10045
Anderson M. Option pricing using hidden Markov models. [Thesis]. University of Cape Town ,Faculty of Science ,Department of Statistical Sciences, 2006 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/10045
