TY - JOUR
T1 - Asset pricing using trading volumes in a hidden regime-switching environment
AU - Elliott, Robert J.
AU - Siu, Tak Kuen
PY - 2015/5/1
Y1 - 2015/5/1
N2 - By utilizing information about prices and trading volumes, we discuss the pricing of European contingent claims in a continuous-time hidden regime-switching environment. Hidden market sentiments described by the states of a continuous-time, finite-state, hidden Markov chain represent a common factor for an asset’s drift and volatility, as well as its trading volumes. Using observations about trading volumes, we present a filtered estimate of the hidden common factor. The asset pricing problem is then considered in a filtered market, where the hidden drift and volatility are replaced by their filtered estimates. We adopt the Esscher transform to select an equivalent martingale measure for pricing and derive a partial-differential integral equation for the option price.
AB - By utilizing information about prices and trading volumes, we discuss the pricing of European contingent claims in a continuous-time hidden regime-switching environment. Hidden market sentiments described by the states of a continuous-time, finite-state, hidden Markov chain represent a common factor for an asset’s drift and volatility, as well as its trading volumes. Using observations about trading volumes, we present a filtered estimate of the hidden common factor. The asset pricing problem is then considered in a filtered market, where the hidden drift and volatility are replaced by their filtered estimates. We adopt the Esscher transform to select an equivalent martingale measure for pricing and derive a partial-differential integral equation for the option price.
UR - http://www.scopus.com/inward/record.url?scp=84939942154&partnerID=8YFLogxK
U2 - 10.1007/s10690-014-9197-4
DO - 10.1007/s10690-014-9197-4
M3 - Article
AN - SCOPUS:84939942154
SN - 1387-2834
VL - 22
SP - 133
EP - 149
JO - Asia-Pacific Financial Markets
JF - Asia-Pacific Financial Markets
IS - 2
ER -