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Title: On pricing and hedging options in regime-switching models with feedback effect
Authors: Elliott, Robert
Siu, Tak Kuen
Badescu, Alexandru
Keywords: Pricing and hedging;Regime-switching
Issue Date: 2011
Publisher: Elsevier
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.
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.
ISSN: 0165-1889
Appears in Collections:Elliott, Robert

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