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.
|Number of pages||12|
|Journal||Stochastic Analysis and Applications|
|Publication status||Published - 2008|
- Black-Scholes equations
- Minimal martingale measure
- Risk minimizing option price
- Regime switching market