Risk-minimizing option pricing under a Markov-modulated jump-diffusion model with stochastic volatility
In this paper, we deal with the pricing of European style options when the dynamics of the risky underlying asset are driven by a Markov-modulated jump diffusion with stochastic volatility. We investigate the Radon–Nikodym derivative for the minimal martingale measure and a partial differential equation approach for pricing European options. An optimal hedging strategy in terms of local risk minimization is obtained.
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Volume (Year): 82 (2012)
Issue (Month): 10 ()
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- Robert J. Elliott & Leunglung Chan & Tak Kuen Siu, 2005. "Option pricing and Esscher transform under regime switching," Annals of Finance, Springer, vol. 1(4), pages 423-432, October.
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- Siu, Tak Kuen & Yang, Hailiang & Lau, John W., 2008. "Pricing currency options under two-factor Markov-modulated stochastic volatility models," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 295-302, December.
- Rüdiger Frey, 2000. "Risk Minimization with Incomplete Information in a Model for High-Frequency Data," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 215-225.
- Schweizer, Martin, 1991. "Option hedging for semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 37(2), pages 339-363, April.
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