Markovian regime-switching market completion using additional Markov jump assets

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

Research output: Contribution to journalReview articleResearchpeer-review

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.

LanguageEnglish
Pages283-305
Number of pages23
JournalIMA Journal of Management Mathematics
Volume23
Issue number3
DOIs
Publication statusPublished - 2012

Fingerprint

Markovian Switching
Regime Switching
Completion
Jump
Martingale
Equivalent Martingale Measure
Contingent Claims
Hedging
Option Pricing
Point Process
Justify
Completeness
Market
Assets
Regime switching
Costs
kernel

Cite this

Zhang, Xin ; Elliott, Robert J. ; Siu, Tak Kuen ; Guo, Junyi. / Markovian regime-switching market completion using additional Markov jump assets. In: IMA Journal of Management Mathematics. 2012 ; Vol. 23, No. 3. pp. 283-305.
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Markovian regime-switching market completion using additional Markov jump assets. / Zhang, Xin; Elliott, Robert J.; Siu, Tak Kuen; Guo, Junyi.

In: IMA Journal of Management Mathematics, Vol. 23, No. 3, 2012, p. 283-305.

Research output: Contribution to journalReview articleResearchpeer-review

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