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|Title:||Asset pricing using trading volumes in a hidden regime-switching environment|
|Citation:||Asia-Pacific Financial Markets, 2015; 22(2):133-149|
|Robert J. Elliot, Tak Kuen Siu|
|Abstract:||By utilizing information about prices and trading volumes, we discuss the pricing of European contingent claims in a continuous-time hidden regime-switching environment. Hidden market sentiments described by the states of a continuous-time, finite-state, hidden Markov chain represent a common factor for an asset’s drift and volatility, as well as its trading volumes. Using observations about trading volumes, we present a filtered estimate of the hidden common factor. The asset pricing problem is then considered in a filtered market, where the hidden drift and volatility are replaced by their filtered estimates. We adopt the Esscher transform to select an equivalent martingale measure for pricing and derive a partial-differential integral equation for the option price.|
|Keywords:||Asset pricing; trading volumes; hidden Markov models; filtering; Esscher transform; PDIE|
|Rights:||© Springer Japan 2014|
|Appears in Collections:||Mathematical Sciences publications|
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