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https://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 |
DOI: | 10.1007/s10690-014-9197-4 |
Appears in Collections: | Aurora harvest 3 Mathematical Sciences publications |
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