On pricing and hedging options in regime-switching models with feedback effect
Date
2011
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
We study the pricing and hedging of European-style derivative securities in a Markov,
regime-switching, model with a feedback e ect depending on the economic condition.
We adopt a pricing kernel which prices both nancial 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.
Description
Article deposited according to publisher policy posted on SHERPA/ROMEO, June 13, 2012.
Keywords
Pricing and hedging, Regime-switching
Citation
Robert J. Elliott, Tak Kuen Siu, Alexandru Badescu, On pricing and hedging options in regime-switching models with feedback effect, Journal of Economic Dynamics and Control, Volume 35, Issue 5, May 2011, Pages 694-713.