Abstract
We study option pricing in a regime switching market where the risk free interest rate, growth rate and the volatility of a stock depends on a finite state Markov chain. Using a minimal martingale measure we show that the risk minimizing option price satisfies a system of Black-Scholes partial differential equations with weak coupling.
| Original language | English |
|---|---|
| Pages (from-to) | 313-324 |
| Number of pages | 12 |
| Journal | Stochastic Analysis and Applications |
| Volume | 26 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 2008 |
| Externally published | Yes |
Keywords
- Black-Scholes equations
- Minimal martingale measure
- Risk minimizing option price
- Regime switching market