A risk-based approach for pricing American options under a generalized Markov regime-switching model

Robert J. Elliott; Tak Kuen Siu

doi:10.1080/14697688.2011.615215

A risk-based approach for pricing American options under a generalized Markov regime-switching model

Robert J. Elliott, Tak Kuen Siu

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

12 Citations (Scopus)

Abstract

This paper considers a risk-based approach for pricing an American contingent claim in an incomplete market described by a continuous-time, Markov, regime-switching jump-diffusion model. We formulate the valuation problem as a stochastic differential game and use dynamic programming. Verification theorems for the Hamilton-Jacobi-Bellman-Issacs (HJBI) variational inequalities of the games are used to determine the seller's and buyer's prices and optimal exercise strategies.

Original language	English
Pages (from-to)	1633-1646
Number of pages	14
Journal	Quantitative Finance
Volume	11
Issue number	11
DOIs	https://doi.org/10.1080/14697688.2011.615215
Publication status	Published - Nov 2011

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A risk-based approach for pricing American options under a generalized Markov regime-switching model

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