Elliott, RobertSiu, Tak KuenBadescu, Alexandru2012-06-132012-06-132011Robert 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 694-713.0165-1889http://hdl.handle.net/1880/48995Article deposited according to publisher policy posted on SHERPA/ROMEO, June 13, 2012.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.engPricing and hedgingRegime-switchingFeedback effectProduct price kernelLocal risk-minimizationjournal article10.11575/PRISM/34090