Option Pricing Under Jump-Diffusion Processes with Regime Switching

Nikita Ratanov

doi:10.1007/s11009-015-9462-7

Option Pricing Under Jump-Diffusion Processes with Regime Switching

Nikita Ratanov

urosario

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6 Scopus citations

Abstract

We study an incomplete market model, based on jump-diffusion processes with parameters that are switched at random times. The set of equivalent martingale measures is determined. An analogue of the fundamental equation for the option price is derived. In the case of the two-state hidden Markov process we obtain explicit formulae for the option prices. Furthermore, we numerically compare the results corresponding to different equivalent martingale measures.

Original language	English (US)
Pages (from-to)	829-845
Number of pages	17
Journal	Methodology and Computing in Applied Probability
Volume	18
Issue number	3
DOIs	https://doi.org/10.1007/s11009-015-9462-7
State	Published - Sep 1 2016

All Science Journal Classification (ASJC) codes

Statistics and Probability
General Mathematics

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10.1007/s11009-015-9462-7

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abstract = "We study an incomplete market model, based on jump-diffusion processes with parameters that are switched at random times. The set of equivalent martingale measures is determined. An analogue of the fundamental equation for the option price is derived. In the case of the two-state hidden Markov process we obtain explicit formulae for the option prices. Furthermore, we numerically compare the results corresponding to different equivalent martingale measures.",

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AB - We study an incomplete market model, based on jump-diffusion processes with parameters that are switched at random times. The set of equivalent martingale measures is determined. An analogue of the fundamental equation for the option price is derived. In the case of the two-state hidden Markov process we obtain explicit formulae for the option prices. Furthermore, we numerically compare the results corresponding to different equivalent martingale measures.

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Option Pricing Under Jump-Diffusion Processes with Regime Switching

Abstract

All Science Journal Classification (ASJC) codes

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