Option pricing when the regime-switching risk is priced | Macquarie University ResearchOnline

Home

List Of Titles

Option pricing when the regime-switching risk is priced

Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/138678

37 Visitors

49 Hits

0 Downloads

Title: Option pricing when the regime-switching risk is priced
Related: Acta mathematicae applicatae sinica, Vol. 25, Issue 3, (2009), p.369-388
DOI: 10.1007/s10255-008-8803-5
Publisher: Springer
Date: 2009
FoR/RFCD Code(s): 010200 Applied Mathematics
Author/Creator: Siu, Tak Kuen
Author/Creator: Yang, Hailiang
Description: We study the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markov-modulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset are modulated by an observable continuous-time, finite-state Markov chain. We develop a two-stage pricing model which can price both the diffusion risk and the regime-switching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the real-world probability measure over different states. Numerical experiments are conducted and their results reveal that the impact of pricing regime-switching risk on the option prices is significant.
Description: 20 page(s)
Subject Keyword: 010200 Applied Mathematics
Subject Keyword: option valuation
Subject Keyword: regime-switching risk
Subject Keyword: two-stage pricing procedure
Subject Keyword: Esscher transform
Subject Keyword: martingale restriction
Subject Keyword: min-max entropy problem
Resource Type: journal article
Organisation: Macquarie University. Dept. of Actuarial Studies

Identifier: http://hdl.handle.net/1959.14/138678
Identifier: ISSN:0168-9673
Identifier: mq-rm-2009002176
Language: eng
Reviewed

Macquarie University ResearchOnline

Search

Browse

Highlights

Resources