Elliott, R.Siu, T.Badescu, A.2011-12-222011-12-222011Journal of Economic Dynamics and Control, 2011; 35(5):694-7130165-18891879-1743http://hdl.handle.net/2440/69016We study the pricing and hedging of European-style derivative securities in a Markov, regime-switching, model with a feedback effect depending on the economic condition. We adopt a pricing kernel which prices both financial and economic risks explicitly in a dynamically incomplete market and we provide an equilibrium analysis. A martingale representation for a European-style index option's price is established based on the price kernel. The martingale representation is then used to construct the local risk-minimizing strategy explicitly and to characterize the corresponding pricing measure. © 2011 Elsevier B.V.enCopyright © 2011 Elsevier B.V. All rights reserved.Pricing and hedgingRegime-switchingFeedback effectProduct price kernelLocal risk-minimizationJournal article002010570810.1016/j.jedc.2010.12.0140002890124000052-s2.0-7995219357931048