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Journal of Computational and Applied Mathematics 256 (2014) 152–167 Contents lists available at ScienceDirect Journal of Computational and Applied Mathematics journal homepage: /locate/cam Option pricing under regime-switching jump–diffusion models Massimo Costabile, Arturo Leccadito, Ivar Massabó, Emilio Russo ∗ Department of Economics, Statistics, and Finance, University of Calabria, Ponte Bucci cubo 3C, 87036, Rende (CS), Italy a r t i c l e i n f o a b s t r a c t Article history: We present an explicit formula and a multinomial approach for pricing contingent claims Received 21 December 2012 under a regime-switching jump–diffusion model. The explicit formula, obtained as an Received in revised form 15 April 2013 expectation of Merton-type formulae for jump–diffusion processes, allows to compute the price of European options in the case of a two-regime economy with lognormal jumps, Keywords: while the multinomial approach allows to accommodate an arbitrary number of regimes Option pricing and a generic jump size distribution, and is suitable for pricing American-style options. Regime-switching models The latter algorithm discretizes log-returns in each regime independently, starting from Jump–diffusion models Multinomial tree the highest volatility regime where a recombining multinomial lattice is established. In the remaining regimes, lattice nodes