Markovian regime-switching market completion using additional Markov jump assets

Xin Zhang*, Robert J. Elliott, Tak Kuen Siu, Junyi Guo

*Corresponding author for this work

Research output: Contribution to journalReview article

6 Citations (Scopus)

Abstract

In this paper, we discuss the use of some representation results for double martingales to value and hedge contingent claims in a Markovian regime-switching market. A set of N Markov jump assets is introduced to complete the Markovian regime-switching market. Using a representation for double martingales, we justify the completeness of the enlarged market. An equivalent martingale measure, or price kernel, in the enlarged market is then identified by a measure change. The option pricing formula and the hedging portfolio in the enlarged market is also discussed. Markovian regime-switching marketsdouble martingalesmartingale representationmarket completionmarked point processes.

Original languageEnglish
Pages (from-to)283-305
Number of pages23
JournalIMA Journal of Management Mathematics
Volume23
Issue number3
DOIs
Publication statusPublished - 2012

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