Good-deal bounds in a regime-switching diffusion market

Research output: Chapter in Book/Report/Conference proceedingConference contribution

4 Citations (Scopus)

Abstract

We consider the pricing of a maturity guarantee, which is equivalent to the pricing of a European put option, in a regime-switching market model. Regime-switching market models have been empirically shown to fit long-term stockmarket data better than many other models.

However, since a regime-switching market is incomplete, there is no unique price for the maturity guarantee. We extend the good-deal pricing bounds idea to the regime-switching market model. This allows us to obtain a reasonable range of prices for the maturity guarantee, by excluding those prices which imply a Sharpe Ratio which is too high. The range of prices can be used as a plausibility check on the chosen price of a maturity guarantee.
Original languageEnglish
Title of host publicationActuarial and Financial Mathematics Conference
Subtitle of host publicationInterplay between Finance and Insurance
PublisherKoninklijke Vlaamse Academie van Belgie
Pages17-28
Number of pages12
ISBN (Print)978 90 6569 087 6
Publication statusPublished - 2011
EventActuarial and Financial Mathematics Conference Interplay between Finance and Insurance - Belguim, Brussels, Belgium
Duration: 6 Feb 20147 Feb 2014

Conference

ConferenceActuarial and Financial Mathematics Conference Interplay between Finance and Insurance
CountryBelgium
CityBrussels
Period6/02/147/02/14

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