Liu, R. H. A new tree method for pricing financial derivatives in a regime-switching mean-reverting model. (English) Zbl 1254.91726 Nonlinear Anal., Real World Appl. 13, No. 6, 2609-2621 (2012). Summary: This paper develops a new tree method for pricing financial derivatives in a regime-switching mean-reverting model. The tree achieves full node recombination and grows linearly as the number of time steps increases. Conditions for non-negative branch probabilities are presented. The weak convergence of the discrete tree approximations to the continuous regime-switching mean-reverting process is established. To illustrate the application in mathematical finance, the recombining tree is used to price commodity options and zero-coupon bonds. Numerical results are provided and compared. Cited in 14 Documents MSC: 91G20 Derivative securities (option pricing, hedging, etc.) Keywords:numerical methods for stochastic nonlinear systems; regime-switching mean-reverting model; binomial tree; financial derivative PDFBibTeX XMLCite \textit{R. H. Liu}, Nonlinear Anal., Real World Appl. 13, No. 6, 2609--2621 (2012; Zbl 1254.91726) Full Text: DOI References: [1] Aingworth, D. D.; Das, S. R.; Motwani, R., A simple approach for pricing equlty options with Markov switching state variables, Quantitative Finance, 6, 95-105 (2006) · Zbl 1136.91410 [2] Bollen, N. P.B., Valuing options in regime-switching models, Journal of Derivatives, 6, 38-49 (1998) [3] Boyle, P.; Draviam, T., Pricing exotic options under regime switching, Insurance: Mathematics and Econimics, 40, 267-282 (2007) · Zbl 1141.91420 [4] Buffington, J.; Elliott, R. J., American options with regime switching, International Journal of Theoretical Applied Finance, 5, 497-514 (2002) · Zbl 1107.91325 [5] Eloe, P.; Liu, R. 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