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Pricing And Filtering In A Two-Dimensional Dividend Switching Model

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  • PAVEL V. GAPEEV

    ()
    (London School of Economics, Department of Mathematics, Houghton Street, London WC2A 2AE, United Kingdom)

  • MONIQUE JEANBLANC

    ()
    (Université d'Évry-Val-d'Essonne, Département de Mathématiques, rue Jarlan, F-91025 Évry Cedex, France; Europlace Institute of Finance, France)

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    Abstract

    We study a model of a financial market in which the dividend rates of two risky assets change their initial values to other constant ones at the times at which certain unobservable external events occur. The asset price dynamics are described by geometric Brownian motions with random drift rates switching at exponential random times, that are independent of each other and the constantly correlated driving Brownian motions. We obtain closed form expressions for the rational values of European contingent claims through the filtering estimates of occurrence of the switching times and their conditional probability density derived given the filtration generated by the underlying asset price processes.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 13 (2010)
    Issue (Month): 07 ()
    Pages: 1001-1017

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    Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:07:p:1001-1017

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    Related research

    Keywords: European contingent claims; random dividend rates; switching times; partial information; Brownian motion; filtering equation; posterior probability; conditional probability density;

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