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Risk Minimizing Option Pricing in a Regime Switching Market 

Authors: Amogh Deshpande a; Mrinal K. Ghosh a
Affiliation:   a Department of Mathematics, Indian Institute of Science, Bangalore, India
DOI: 10.1080/07362990701857194
Publication Frequency: 6 issues per year
Published in: journal Stochastic Analysis and Applications, Volume 26, Issue 2 March 2008 , pages 313 - 324
Formats available: HTML (English) : PDF (English)
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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.
Keywords: Black-Scholes equations; Minimal martingale measure; Risk minimizing option price; Regime switching market
Mathematics Subject Classification (2000): 91B28; 91B70
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