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Good-Deal Bounds in a Regime-Switching Diffusion Market


  • Catherine Donnelly


We consider option pricing in a regime-switching diffusion market. As the market is incomplete, there is no unique price for a derivative. We apply the good-deal pricing bounds idea to obtain ranges for the price of a derivative. As an illustration, we calculate the good-deal pricing bounds for a European call option and we also examine the stability of these bounds when we change the generator of the Markov chain which drives the regime-switching. We find that the pricing bounds depend strongly on the choice of the generator.

Suggested Citation

  • Catherine Donnelly, 2011. "Good-Deal Bounds in a Regime-Switching Diffusion Market," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(6), pages 491-515, May.
  • Handle: RePEc:taf:apmtfi:v:18:y:2011:i:6:p:491-515 DOI: 10.1080/1350486X.2011.591156

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    References listed on IDEAS

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    9. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
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    11. Simon, S. & Goovaerts, M. J. & Dhaene, J., 2000. "An easy computable upper bound for the price of an arithmetic Asian option," Insurance: Mathematics and Economics, Elsevier, vol. 26(2-3), pages 175-183, May.
    12. repec:dau:papers:123456789/1448 is not listed on IDEAS
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    1. repec:spr:mathme:v:86:y:2017:i:1:d:10.1007_s00186-017-0588-y is not listed on IDEAS
    2. Dirk Becherer & Klebert Kentia, 2016. "Hedging under generalized good-deal bounds and model uncertainty," Papers 1607.04488,, revised Apr 2017.

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