Convergence of estimated option price in a regime switching market

DOI10.1007/S13226-016-0182-7MaRDI QIDQ2520133zbMATH OpenOpenAlexFDO

Authors Anindya Goswami, Sanket Nandan

Publication date 13 December 2016

Published in Indian Journal of Pure \& Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1506.03621

zbMATH Keywords

Volterra integral equationoptimal hedgingsemi-Markov processeslocally risk minimizing pricingnon-local parabolic PDE

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Volterra integral equations (45D05) Financial applications of other theories (91G80)

Abstract: In an observed generalized semi-Markov regime, estimation of transition rate of regime switching leads towards calculation of locally risk minimizing option price. Despite the uniform convergence of estimated step function of transition rate, to meet the existence of classical solution of the modified price equation, the estimator is approximated in the class of smooth functions and furthermore, the convergence is established. Later, the existence of the solution of the modified price equation is verified and the point-wise convergence of such approximation of option price is proved to answer the tractability of its application in Finance. To demonstrate the consistency in result a numerical experiment has been reported.

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Cites work

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Cited in

(5)

• Convergence of option rewards for multivariate price processes
• Inference of binary regime models with jump discontinuities
• Convergence rate of regime-switching trees
• A system of non-local parabolic PDE and application to option pricing
• When does convergence of asset price processes imply convergence of option prices?

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