Abstract
We consider option pricing in a regime-switching diffusion market. As the market is incomplete, there is no unique price for a derivative. We apply the good-deal pricing bounds idea to obtain ranges for the price of a derivative. As an illustration, we calculate the good-deal pricing bounds for a European call option and we also examine the stability of these bounds when we change the generator of the Markov chain which drives the regime-switching. We find that the pricing bounds depend strongly on the choice of the generator.
| Original language | English |
|---|---|
| Pages (from-to) | 491-515 |
| Number of pages | 25 |
| Journal | Applied Mathematical Finance |
| Volume | 18 |
| Issue number | 6 |
| Early online date | 10 Nov 2011 |
| DOIs | |
| Publication status | Published - 2011 |