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Article: Option pricing when the regime-switching risk is priced

TitleOption pricing when the regime-switching risk is priced
Authors
KeywordsEsscher Transform
Martingale Restriction
Min-Max Entropy Problem
Option Valuation
Regime-Switching Risk
Two-Stage Pricing Procedure
Issue Date2009
PublisherSpringer Verlag. The Journal's web site is located at http://link.springer.de/link/service/journals/10255/
Citation
Acta Mathematicae Applicatae Sinica, 2009, v. 25 n. 3, p. 369-388 How to Cite?
AbstractWe study the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markov-modulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset are modulated by an observable continuous-time, finite-state Markov chain. We develop a two-stage pricing model which can price both the diffusion risk and the regime-switching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the real-world probability measure over different states. Numerical experiments are conducted and their results reveal that the impact of pricing regime-switching risk on the option prices is significant. © 2009 The Editorial Office of AMAS & Springer-Verlag 2009.
Persistent Identifierhttp://hdl.handle.net/10722/172460
ISSN
2015 Impact Factor: 0.25
2015 SCImago Journal Rankings: 0.220
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorSiu, TKen_US
dc.contributor.authorYang, Hen_US
dc.date.accessioned2012-10-30T06:22:38Z-
dc.date.available2012-10-30T06:22:38Z-
dc.date.issued2009en_US
dc.identifier.citationActa Mathematicae Applicatae Sinica, 2009, v. 25 n. 3, p. 369-388en_US
dc.identifier.issn0168-9673en_US
dc.identifier.urihttp://hdl.handle.net/10722/172460-
dc.description.abstractWe study the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markov-modulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset are modulated by an observable continuous-time, finite-state Markov chain. We develop a two-stage pricing model which can price both the diffusion risk and the regime-switching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the real-world probability measure over different states. Numerical experiments are conducted and their results reveal that the impact of pricing regime-switching risk on the option prices is significant. © 2009 The Editorial Office of AMAS & Springer-Verlag 2009.en_US
dc.languageengen_US
dc.publisherSpringer Verlag. The Journal's web site is located at http://link.springer.de/link/service/journals/10255/en_US
dc.relation.ispartofActa Mathematicae Applicatae Sinicaen_US
dc.subjectEsscher Transformen_US
dc.subjectMartingale Restrictionen_US
dc.subjectMin-Max Entropy Problemen_US
dc.subjectOption Valuationen_US
dc.subjectRegime-Switching Risken_US
dc.subjectTwo-Stage Pricing Procedureen_US
dc.titleOption pricing when the regime-switching risk is priceden_US
dc.typeArticleen_US
dc.identifier.emailYang, H: hlyang@hku.hken_US
dc.identifier.authorityYang, H=rp00826en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1007/s10255-008-8803-5en_US
dc.identifier.scopuseid_2-s2.0-66749104703en_US
dc.identifier.hkuros173048-
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-66749104703&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume25en_US
dc.identifier.issue3en_US
dc.identifier.spage369en_US
dc.identifier.epage388en_US
dc.identifier.isiWOS:000266479900003-
dc.publisher.placeGermanyen_US
dc.identifier.scopusauthoridSiu, TK=8655758200en_US
dc.identifier.scopusauthoridYang, H=7406559537en_US
dc.identifier.citeulike4698024-

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