Pricing and hedging contingent claims with regime switching risk | Macquarie University ResearchOnline

Home

List Of Titles

Pricing and hedging contingent claims with regime switching risk

Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/170484

54 Visitors

66 Hits

0 Downloads

Title: Pricing and hedging contingent claims with regime switching risk
Related: Communications in mathematical sciences, Vol. 9, Issue 2, (2011), p.477-498
Related: http://www.intlpress.com/CMS/2011/issue9-2/
Publisher: International Press
Date: 2011
Author/Creator: Elliott, Robert J
Author/Creator: Siu, Tak Kuen
Description: We study the pricing and hedging of contingent claims in a Markov regime-switching market with a money market account, a zero-coupon bond, and an ordinary share. General contingent claims with payoffs depending on both the share price and the state of a Markov chain describing regime switching are considered. A general pricing kernel defined by the product of two density processes is used to explicitly take into account regime switching risk. Under some differentiability and boundedness conditions, a martingale representation result is established and the integrands in the representation are explicitly identified with respect to the general pricing kernel. We then determine a pricing kernel and a hedging strategy by minimizing the residual risk due to incomplete hedging. Our analysis is also extended to Asian-style and American-style general contingent claims.
Description: 22 page(s)
Subject Keyword: American options
Subject Keyword: Asian options
Subject Keyword: Zero-coupon bonds
Subject Keyword: Contingent claims
Subject Keyword: Hedging
Subject Keyword: Martingale representation
Subject Keyword: Product density processes
Subject Keyword: Regime switching risk
Subject Keyword: Residual risk
Subject Keyword: Stochastic flows
Subject Keyword: Valuation
Resource Type: journal article
Organisation: Macquarie University. Dept. of Applied Finance and Actuarial Studies

Identifier: http://hdl.handle.net/1959.14/170484
Identifier: ISSN:1539-6746
Identifier: mq_res-ext-2-s2.0-78650449270
Language: eng
Reviewed

Macquarie University ResearchOnline

Search

Browse

Highlights

Resources