Abstract:The mutual conversion between different market conditions in reality related to the stability of the market and asset price stability, is a realistic problem worthy of study, the problem also attracts a lot of attention in the industry and scholars.Using the hidden Markov model can represent this market phenomenon, and derive the stock option pricing formula. Further, compared with examples of the option pricing results under the two binomial tree models, it is found although the regime switchingmodel set and the calculation are more complicated, but more in line with the objective reality, but theoption pricing results are worthof reference by theissuesof financial asset pricing and risk management.

Key Words:Regime-Switching; Hidden Markov Model;Binominal Tree Model;Option Pricing