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Type: Journal article
Title: Pricing and hedging contingent claims with regime switching risk
Author: Elliott, R.
Siu, T.
Citation: Communications in Mathematical Sciences, 2011; 9(2):477-498
Publisher: International Press
Issue Date: 2011
ISSN: 1539-6746
Statement of
Robert J. Elliott and Tak Kuen Siu
Abstract: We study the pricing and hedging of contingent claims in a Markov regime-switching market with a money market account, a zero-coupon bond, and an ordinary share. General contingent claims with payoffs depending on both the share price and the state of a Markov chain describing regime switching are considered. A general pricing kernel defined by the product of two density processes is used to explicitly take into account regime switching risk. Under some differentiability and boundedness conditions, a martingale representation result is established and the integrands in the representation are explicitly identified with respect to the general pricing kernel. We then determine a pricing kernel and a hedging strategy by minimizing the residual risk due to incomplete hedging. Our analysis is also extended to Asian-style and American-style general contingent claims.
Rights: Copyright status unknown
DOI: 10.4310/CMS.2011.v9.n2.a6
Grant ID: ARC
Published version:
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