A copula-based regime-switching model for rainbow option pricing

In this paper we consider the pricing of rainbow options based on copulas and regime switching model. Considering the non-constant volatility, the characteristic of asymmetries and heavy tails, we introduce regime-switching into multi-asset option pricing model, which not only solves the unreasonable assumption of constant volatility, but also avoids the complexity in calculating the variable volatility. A numerical example is given to show the using of this method.