Good-deal bounds in a regime-switching diffusion market

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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 languageEnglish
Pages (from-to)491-515
Number of pages25
JournalApplied Mathematical Finance
Volume18
Issue number6
Early online date10 Nov 2011
DOIs
Publication statusPublished - 2011

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