Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5097965 | Journal of Economic Dynamics and Control | 2017 | 35 Pages |
Abstract
We consider a general jump-diffusion market with regime-switching where the jump risk is modeled as a Markov-modulated Poisson random measure. In this incomplete market, we price the variance-swaps using a combination of the Esscher transform and change of measure on time-inhomogeneous Markov chains. We study the dynamic optimal investment problem of the variance-swaps and characterize the optimal feedback strategy. Moreover, a closed-form solution to the HJB PDE associated with the stochastic control problem is established and the verification theorem is proved. The numerical analysis based on a two-state Markov chain uncovers some robust features of the optimal investment strategy.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Lijun Bo, Dan Tang, Yongjin Wang,