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https://hdl.handle.net/2440/79576
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Type: | Journal article |
Title: | Option pricing and filtering with hidden Markov-Modulated pure-jump processes |
Author: | Elliott, R. Siu, T. |
Citation: | Applied Mathematical Finance, 2013; 20(1):1-25 |
Publisher: | Routledge |
Issue Date: | 2013 |
ISSN: | 1350-486X 1466-4313 |
Statement of Responsibility: | Robert J. Elliott & Tak Kuen Siu |
Abstract: | This article discusses the pricing of derivatives in a continuous-time, hidden Markov-modulated, pure-jump asset price model. The hidden Markov chain modulating the pure-jump asset price model describes the evolution of the hidden state of an economy over time. The market model is incomplete. We employ a version of the Esscher transform to select a price kernel for valuation. We derive a valuation formula for European options using a Fourier transform and the correlation theorem. This formula depends on the hidden Markov chain. It is then estimated using a robust filter of the chain. |
Keywords: | Option pricing hidden Markov-modulated pure-jump processes Esscher transform Laplace cumulant process robust filters integral representation |
Rights: | © 2013 Taylor & Francis |
DOI: | 10.1080/1350486X.2012.655929 |
Published version: | http://dx.doi.org/10.1080/1350486x.2012.655929 |
Appears in Collections: | Aurora harvest 4 Mathematical Sciences publications |
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