Please use this identifier to cite or link to this item:
https://hdl.handle.net/2440/69016
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Type: | Journal article |
Title: | On pricing and hedging options in regime-switching models with feedback effect |
Author: | Elliott, R. Siu, T. Badescu, A. |
Citation: | Journal of Economic Dynamics and Control, 2011; 35(5):694-713 |
Publisher: | Elsevier Science BV |
Issue Date: | 2011 |
ISSN: | 0165-1889 1879-1743 |
Statement of Responsibility: | Robert J. Elliott, Tak Kuen Siu, Alexandru Badescu |
Abstract: | 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. © 2011 Elsevier B.V. |
Keywords: | Pricing and hedging Regime-switching Feedback effect Product price kernel Local risk-minimization |
Rights: | Copyright © 2011 Elsevier B.V. All rights reserved. |
DOI: | 10.1016/j.jedc.2010.12.014 |
Published version: | http://dx.doi.org/10.1016/j.jedc.2010.12.014 |
Appears in Collections: | Aurora harvest Mathematical Sciences publications |
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RA_hdl_69016.pdf Restricted Access | Restricted Access | 328.74 kB | Adobe PDF | View/Open |
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