Equity with Markov-modulated dividends

Giuseppe Di Graziano and Leonard C G Rogers

Quantitative Finance, 2009, vol. 9, issue 1, pages 19-26

Abstract: We introduce a simple model for the pricing of European-style options when the underlying dividend process is given by a geometric Brownian motion with Markov-modulated coefficients. It turns out that the corresponding stock process is characterized by both stochastic coefficients and jumps. Transform methods are used to recover option prices. The model is calibrated to market data and the results compared with some well-known stochastic volatility models.

Keywords: Stochastic interest rates; Structure of financial markets; Stochastic volatility; Stochastic control; Quantitative finance; Pricing models; Price formation (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:taf:quantf:v:9:y:2009:i:1:p:19-26

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