A note on differentiability in a Markov Chain market using stochastic flows

Robert J. Elliott*, Tak Kuen Siu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

Using stochastic flows of diffeomorphisms relating to a Markov chain together with the Itô's differentiation rule, the differentiability of the price of a European-style contingent claim with respect to the underlying state variables is proved in a continuous-time Markov chain market. The differentiability results are also used to calculate the Greeks for hedging.

Original languageEnglish
Pages (from-to)110-122
Number of pages13
JournalStochastic Analysis and Applications
Volume33
Issue number1
DOIs
Publication statusPublished - 2 Jan 2015

Keywords

  • Differentiability
  • Hedging
  • Markov chain market
  • Stochastic flows

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