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Article: Option pricing when the regime-switching risk is priced
Title | Option pricing when the regime-switching risk is priced |
---|---|
Authors | |
Keywords | Esscher Transform Martingale Restriction Min-Max Entropy Problem Option Valuation Regime-Switching Risk Two-Stage Pricing Procedure |
Issue Date | 2009 |
Publisher | Springer 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? |
Abstract | We 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 Identifier | http://hdl.handle.net/10722/172460 |
ISSN | 2023 Impact Factor: 0.9 2023 SCImago Journal Rankings: 0.269 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
---|---|---|
dc.contributor.author | Siu, TK | en_US |
dc.contributor.author | Yang, H | en_US |
dc.date.accessioned | 2012-10-30T06:22:38Z | - |
dc.date.available | 2012-10-30T06:22:38Z | - |
dc.date.issued | 2009 | en_US |
dc.identifier.citation | Acta Mathematicae Applicatae Sinica, 2009, v. 25 n. 3, p. 369-388 | en_US |
dc.identifier.issn | 0168-9673 | en_US |
dc.identifier.uri | http://hdl.handle.net/10722/172460 | - |
dc.description.abstract | We 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.language | eng | en_US |
dc.publisher | Springer Verlag. The Journal's web site is located at http://link.springer.de/link/service/journals/10255/ | en_US |
dc.relation.ispartof | Acta Mathematicae Applicatae Sinica | en_US |
dc.subject | Esscher Transform | en_US |
dc.subject | Martingale Restriction | en_US |
dc.subject | Min-Max Entropy Problem | en_US |
dc.subject | Option Valuation | en_US |
dc.subject | Regime-Switching Risk | en_US |
dc.subject | Two-Stage Pricing Procedure | en_US |
dc.title | Option pricing when the regime-switching risk is priced | en_US |
dc.type | Article | en_US |
dc.identifier.email | Yang, H: hlyang@hku.hk | en_US |
dc.identifier.authority | Yang, H=rp00826 | en_US |
dc.description.nature | link_to_subscribed_fulltext | en_US |
dc.identifier.doi | 10.1007/s10255-008-8803-5 | en_US |
dc.identifier.scopus | eid_2-s2.0-66749104703 | en_US |
dc.identifier.hkuros | 173048 | - |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-66749104703&selection=ref&src=s&origin=recordpage | en_US |
dc.identifier.volume | 25 | en_US |
dc.identifier.issue | 3 | en_US |
dc.identifier.spage | 369 | en_US |
dc.identifier.epage | 388 | en_US |
dc.identifier.isi | WOS:000266479900003 | - |
dc.publisher.place | Germany | en_US |
dc.identifier.scopusauthorid | Siu, TK=8655758200 | en_US |
dc.identifier.scopusauthorid | Yang, H=7406559537 | en_US |
dc.identifier.citeulike | 4698024 | - |
dc.identifier.issnl | 0168-9673 | - |