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Erschienen in:
Robustification of an On-line EM Algorithm for Modelling Asset Prices Within an HMM Kapitel lesen Erstes Kapitel lesen

2014 | OriginalPaper | Buchkapitel

8. A Hidden Markov-Modulated Jump Diffusion Model for European Option Pricing

verfasst von : Tak Kuen Siu

Erschienen in: Hidden Markov Models in Finance

Verlag: Springer US

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Abstract

The valuation of a European-style contingent claim is discussed in a hidden Markov regime-switching jump-diffusion market, where the evolution of a hidden economic state process over time is described by a continuous-time, finite-state, hidden Markov chain. A two-stage procedure is used to discuss the option valuation problem. Firstly filtering theory is employed to transform the original market with hidden quantities into a filtered market with complete observations. Then a generalized version of the Esscher transform based on a Doléan-Dade stochastic exponential is employed to select a pricing kernel in the filtered market. A partial-differential-integral equation for the price of a European-style option is presented.

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Vorheriges Kapitel A Stochastic Approximation Approach for Trend-Following Trading
Nächstes Kapitel An Exact Formula for Pricing American Exchange Options with Regime Switching
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Metadaten
Titel
A Hidden Markov-Modulated Jump Diffusion Model for European Option Pricing
verfasst von
Tak Kuen Siu
Copyright-Jahr
2014
Verlag
Springer US
Buch
Hidden Markov Models in Finance

Print ISBN: 978-1-4899-7441-9

Electronic ISBN: 978-1-4899-7442-6

Copyright-Jahr: 2014

DOI
https://doi.org/10.1007/978-1-4899-7442-6_8

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