Price dynamics under stochastic process switching: some extensions and an application to EMU
AbstractIn this paper we solve a particular type of stochastic process switching problem where the date of switching is fixed and known but the terminal price may depend on past prices. We derive closed-form solutions for the price dynamics of the asset before the terminal date and deduce the variance and jump components of these dynamics at the announcement. We subsequently extend the model to price dynamics prior to the announcement of the regime switch assuming that markets may have some expectations regarding the occurrence and/or the type of the regime switch. Finally, we apply the general model to discuss the implications of the chosen conversion modalities in the European Monetary Union (EMU) conversion procedure. (C) 1999 Elsevier Science Ltd. All rights reserved.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/101571.
Date of creation: Apr 1999
Date of revision:
Publication status: Published in Journal of international money and finance (1999-04) v.18, p.195-224
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Web page: http://www.kuleuven.be
stochastic process switching; asset pricing; emu; conversion rates;
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