Good-deal bounds in a regime-switching diffusion market

DOI10.1080/1350486X.2011.591156MaRDI QIDQ2889602zbMATH OpenFDO

Authors Catherine Donnelly

Publication date 8 June 2012

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1006.2273

zbMATH Keywords

regime-switchingoption pricingstabilitySharpe ratiopricing boundsgood-deal

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Financial applications of other theories (91G80)

Abstract: We consider option pricing in a regime-switching diffusion market. As the market is incomplete, there is no unique price for a derivative. We apply the good-deal pricing bounds idea to obtain ranges for the price of a derivative. As an illustration, we calculate the good-deal pricing bounds for a European call option and we also examine the stability of these bounds when we change the generator of the Markov chain which drives the regime-switching. We find that the pricing bounds depend strongly on the choice of the generator.

Recommendations

• Risk Minimizing Option Pricing in a Regime Switching Market
• Towards a General Theory of Good-Deal Bounds*
• scientific article; zbMATH DE number 1897416
• Option pricing under jump-diffusion processes with regime switching
• Pricing exotic options under regime switching

Cites work

• scientific article; zbMATH DE number 3951715 (Why is no real title available?)
• A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle
• A Regime-Switching Model of Long-Term Stock Returns
• Arbitrage Theory in Continuous Time
• Double martingales
• Dynamic utility-based good deal bounds
• Generalised Sharpe Ratios and Asset Pricing in Incomplete Markets *
• Pricing options in incomplete equity markets via the instantaneous Sharpe ratio
• Towards a General Theory of Good-Deal Bounds*

Cited in

(3)

• Good-deal option price bounds for a non-traded event with stochastic return: a note
• Robust evaluation of SCR for participating life insurances under Solvency II
• Hedging under generalized good-deal bounds and model uncertainty

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