Please use this identifier to cite or link to this item:
Scopus Web of ScienceĀ® Altmetric
Type: Journal article
Title: Option pricing and Esscher transform under regime switching
Author: Elliott, R.
Chan, L.
Siu, T.
Citation: Annals of Finance, 2005; 1(4):423-432
Publisher: Springer-Verlag
Issue Date: 2005
ISSN: 1614-2446
Statement of
Robert J. Elliott, Leunglung Chan and Tak Kuen Siu
Abstract: We consider the option pricing problem when the risky underlying assets are driven by Markov-modulated Geometric Brownian Motion (GBM). That is, the market parameters, for instance, the market interest rate, the appreciation rate and the volatility of the underlying risky asset, depend on unobservable states of the economy which are modelled by a continuous-time Hidden Markov process. The market described by the Markov-modulated GBM model is incomplete in general and, hence, the martingale measure is not unique. We adopt a regime switching random Esscher transform to determine an equivalent martingale pricing measure. As in Miyahara [33], we can justify our pricing result by the minimal entropy martingale measure (MEMM).
Keywords: Option pricing
Regime switching
Hidden Markov chain model
Esscher transform
DOI: 10.1007/s10436-005-0013-z
Published version:
Appears in Collections:Applied Mathematics publications
Aurora harvest 2

Files in This Item:
There are no files associated with this item.

Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.