Please use this identifier to cite or link to this item: http://hdl.handle.net/2440/95009
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Type: Journal article
Title: Asset pricing using trading volumes in a hidden regime-switching environment
Author: Elliott, R.
Siu, T.
Citation: Asia-Pacific Financial Markets, 2015; 22(2):133-149
Publisher: Springer
Issue Date: 2015
ISSN: 1387-2834
1573-6946
Statement of
Responsibility: 
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
RMID: 0030015519
DOI: 10.1007/s10690-014-9197-4
Appears in Collections:Mathematical Sciences publications

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