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Good-Deal Bounds in a Regime-Switching Diffusion Market

  • Catherine Donnelly
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    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.

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    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 6 (May)
    Pages: 491-515

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    Handle: RePEc:taf:apmtfi:v:18:y:2011:i:6:p:491-515
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