(Elsevier, 2011) Elliott, Robert; Siu, Tak Kuen; Badescu, Alexandru
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.