Risk minimizing option pricing in a regime switching market. (English) Zbl 1133.91415

Deshpande, Amogh; Ghosh, Mrinal K.

Stochastic Anal. Appl. 26, No. 2, 313-324 (2008).

Summary: 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.

MSC:

91G20	Derivative securities (option pricing, hedging, etc.)
91B70	Stochastic models in economics

Keywords:

Black-Scholes equations; minimal martingale measure; risk minimizing option price; regime switching market

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