TY - JOUR
T1 - Pricing dynamic fund protection under hidden Markov models
AU - Fan, Kun
AU - Shen, Yang
AU - Siu, Tak Kuen
AU - Wang, Rongming
PY - 2018/1/1
Y1 - 2018/1/1
N2 - In this article, we discuss the pricing of dynamic fund protection when the value process of the investment fund is governed by a geometric Brownian motion with parameters modulated by a continuous-time, finitestate hidden Markov chain. Under a risk-neutral probability measure, selected by the Esscher transform, we adopt the partial differential equation approach to value the dynamic fund protection. Using the estimated sequence of the hidden Markov chain, we apply the Baum-Welch algorithm and the Viterbi algorithm to derive the maximum likelihood estimates of the parameters. Numerical examples are provided to illustrate the practical implementation of the model.
AB - In this article, we discuss the pricing of dynamic fund protection when the value process of the investment fund is governed by a geometric Brownian motion with parameters modulated by a continuous-time, finitestate hidden Markov chain. Under a risk-neutral probability measure, selected by the Esscher transform, we adopt the partial differential equation approach to value the dynamic fund protection. Using the estimated sequence of the hidden Markov chain, we apply the Baum-Welch algorithm and the Viterbi algorithm to derive the maximum likelihood estimates of the parameters. Numerical examples are provided to illustrate the practical implementation of the model.
KW - dynamic fund protection
KW - hidden Markov model
KW - Baum–Welch algorithm
KW - Viterbi algorithm
UR - http://www.scopus.com/inward/record.url?scp=85040122784&partnerID=8YFLogxK
UR - http://purl.org/au-research/grants/arc/DP130103517
U2 - 10.1093/imaman/dpw014
DO - 10.1093/imaman/dpw014
M3 - Article
AN - SCOPUS:85040122784
SN - 1471-678X
VL - 29
SP - 99
EP - 117
JO - IMA Journal of Management Mathematics
JF - IMA Journal of Management Mathematics
IS - 1
ER -