On pricing and hedging options in regime-switching models with feedback effect | Macquarie University ResearchOnline

Home

Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/136392

39 Visitors

42 Hits

0 Downloads

Title: On pricing and hedging options in regime-switching models with feedback effect
Related: Journal of economic dynamics and control, Vol. 35, No. 5, (2011), p.694-713
DOI: 10.1016/j.jedc.2010.12.014
Publisher: Elsevier BV
Date: 2011
Author/Creator: Elliott, Robert J
Author/Creator: Siu, Tak Kuen
Author/Creator: Badescu, Alexandru
Description: We 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.
Description: 20 page(s)
Subject Keyword: Feedback effect
Subject Keyword: Local risk-minimization
Subject Keyword: Pricing and hedging
Subject Keyword: Product price kernel
Subject Keyword: Regime-switching
Resource Type: journal article
Organisation: Macquarie University. Dept. of Applied Finance and Actuarial Studies

Macquarie University ResearchOnline