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Good-deal bounds in a regime-switching diffusion market

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  • Catherine Donnelly

Abstract

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, 2010. "Good-deal bounds in a regime-switching diffusion market," Papers 1006.2273, arXiv.org, revised Nov 2010.
    • Handle: RePEc:arx:papers:1006.2273
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    File URL: http://arxiv.org/pdf/1006.2273
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