Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099542 | Journal of Economic Dynamics and Control | 2011 | 20 Pages |
Abstract
We study the pricing and hedging of European-style derivative securities in a Markov, regime-switching, model with a feedback effect depending on the economic condition. We adopt a pricing kernel which prices both financial and economic risks explicitly in a dynamically incomplete market and we provide an equilibrium analysis. A martingale representation for a European-style index option's price is established based on the price kernel. The martingale representation is then used to construct the local risk-minimizing strategy explicitly and to characterize the corresponding pricing measure.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Robert J. Elliott, Tak Kuen Siu, Alexandru Badescu,