A Regime-Switching Model Of European Option With Dividend Payment

The regime-switching model is a hot topic among the current studies of option pricing.The development of this kind of model derives from the need for a more realistic model that reflects the stochastic market status better.Since the main factor that controls the price movement of a stock is the market trend,it is necessary to subject the key parameters of the stock price movement to the overall market movement.This paper discusses a class of European option pricing problems with dividend payments: The instantaneous rate of return of the underlying risky asset depends on the state of the market.This state transition model is derived from a geometric Brownian driven by a two-state Markov chain movement.In this paper,we derive the European option pricing formula by martingale method,and then approximate the pricing formula by stochastic numerical integration,and use Monte Carlo method to carry on the numerical simulation.