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Asymptotic analysis of option pricing in a Markov modulated market

Arnab Basu and Mrinal K.Ghosh
Journal Name
Operations Research Letters
Journal Publication
others
Publication Year
2009
Journal Publications Functional Area
Decision Sciences and Information Systems
Publication Date
Vol. 37, Issue 6, Nov 2009, P 415-419
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.

Asymptotic analysis of option pricing in a Markov modulated market

Author(s) Name: Arnab Basu and Mrinal K.Ghosh
Journal Name: Operations Research Letters
Volume: Vol. 37, Issue 6, Nov 2009, P 415-419
Year of Publication: 2009
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.