Asymptotic analysis of option pricing in a Markov modulated market

Basu, Arnab ; Ghosh, Mrinal K. (2009) Asymptotic analysis of option pricing in a Markov modulated market Operations Research Letters, 37 (6). pp. 415-419. ISSN 0167-6377

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Official URL: http://linkinghub.elsevier.com/retrieve/pii/S01676...

Related URL: http://dx.doi.org/10.1016/j.orl.2009.06.005

Abstract

We address asymptotic analysis of option pricing in a regime switching market where the risk free interest rate, growth rate and the volatility of the stocks depend on a finite state Markov chain. We study two variations of the chain namely, when the chain is moving very fast compared to the underlying asset price and when it is moving very slow. Using quadratic hedging and asymptotic expansion, we derive corrections on the locally risk minimizing option price.

Item Type:Article
Source:Copyright of this article belongs to Elsevier Science.
Keywords:Regime Switching Market; Minimal Martingale Measure; Risk Minimizing Option Price; Asymptotic Expansion
ID Code:11859
Deposited On:13 Nov 2010 13:47
Last Modified:02 Jun 2011 07:37

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