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arXiv · 1006.2273

Good-deal bounds in a regime-switching diffusion market

Catherine Donnelly
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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.

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Catherine Donnelly. 2010-11-22. Good-deal bounds in a regime-switching diffusion market. https://doi.org/10.1080/1350486x.2011.591156

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