Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/114662
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- Title
- A Hidden Markov regime-switching model for option valuation
- Related
- Insurance, mathematics and economics, Vol. 47, Issue 3 (2010), p.374-384
- DOI
- 10.1016/j.insmatheco.2010.08.003
- Publisher
- Elsevier
- Date
- 2010
- FoR/RFCD Code(s)
-
010400 Statistics
140200 Applied Economics
- Author/Creator
- Liew, Chuin
- Author/Creator
- Siu, Tak Kuen
- Description
- We investigate two approaches, namely, the Esscher transform and the extended Girsanov’s principle, for option valuation in a discrete-time hidden Markov regime-switching Gaussian model. The model’s parameters including the interest rate, the appreciation rate and the volatility of a risky asset are governed by a discrete-time, finite-state, hidden Markov chain whose states represent the hidden states of an economy. We give a recursive filter for the hidden Markov chain and estimates of model parameters using a filter-based EM algorithm. We also derive predictors for the hidden Markov chain and some related quantities. These quantities are used to estimate the price of a standard European call option. Numerical examples based on real financial data are provided to illustrate the implementation of the proposed method.
- Description
- 11 page(s)
- Subject Keyword
- 010400 Statistics
- Subject Keyword
- 140200 Applied Economics
- Subject Keyword
- pption pricing
- Subject Keyword
- regime-switching
- Subject Keyword
- hidden Markov model
- Subject Keyword
- Esscher transform
- Subject Keyword
- extended Girsanov principle
- Subject Keyword
- filters and predictors
- Resource Type
- journal article
- Organisation
- Macquarie University. Dept. of Actuarial Studies
- Identifier
- http://hdl.handle.net/1959.14/114662
- Identifier
- ISSN:0167-6687
- Identifier
- mq-rm-2010003740
- Language
- eng
- Reviewed
