Markovian regime-switching market completion using additional Markov jump assets
Date
2012
Authors
Zhang, X.
Elliott, R.
Siu, T.
Guo, J.
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Journal article
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IMA Journal of Management Mathematics, 2012; 23(3):283-305
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Xin Zhang, Robert J. Elliott, Tak Kuen Siu and Junyi Guo
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Abstract
In this paper, we discuss the use of some representation results for double martingales to value and hedge contingent claims in a Markovian regime-switching market. A set of N Markov jump assets is introduced to complete the Markovian regime-switching market. Using a representation for double martingales, we justify the completeness of the enlarged market. An equivalent martingale measure, or price kernel, in the enlarged market is then identified by a measure change. The option pricing formula and the hedging portfolio in the enlarged market is also discussed.
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© The authors 2011