Martingale representation for contingent claims with regime switching | Macquarie University ResearchOnline

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Title: Martingale representation for contingent claims with regime switching
Related: Communications on stochastic analysis, Vol. 1, Issue 2, (2007), p.279-292
Related: https://www.math.lsu.edu/cosa/1-2-07%5B121%5D.pdf
Publisher: Serials Publications
Date: 2007
FoR/RFCD Code(s): 010200 Applied Mathematics
Author/Creator: Elliott, Robert J
Author/Creator: Siu, Tak Kuen
Author/Creator: Yang, Hailiang
Description: We derive a martingale representation for a contingent claim under a Markov-modulated version of the Black-Scholes economy. The martingale representation for the price of the claim is established with respect to an equivalent martingale measure chosen by the Esscher transform. Under some differentiability conditions for the coefficients of the price processes, we shall identify explicitly the integrands in the martingale representation using stochastic flows. We shall introduce a zero-coupon bond to minimize the residual risk due to incomplete hedging.
Description: 14 page(s)
Subject Keyword: 010200 Applied Mathematics
Subject Keyword: Martingale Representation
Subject Keyword: regime-switching risk
Subject Keyword: Esscher transform
Subject Keyword: Contingent Claims
Subject Keyword: Stochastic Flows
Subject Keyword: Risk-minimization
Resource Type: journal article
Organisation: Macquarie University. Dept. of Actuarial Studies

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