A Markov-modulated model for stocks paying discrete dividends

E. Sakkas and H. Le

Insurance: Mathematics and Economics, 2009, vol. 45, issue 1, 19-24

Abstract: We extend the model in [Korn, R., Rogers, L.C.G., 2005. Stock paying discrete dividends: modelling and option pricing. Journal of Derivatives 13, 44-49] for (discrete) dividend processes to incorporate the dependence of assets on the market mode or the state of the economy, where the latter is modeled by a hidden finite-state Markov chain. We then derive the resulting dynamics of the stock price and various option-pricing formulae. It turns out that the stock price jumps not only at the time of the dividend payment, but also when the underlying Markov chain jumps.

Keywords: Option; pricing; Hidden; Markov; chain; Dividend (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:45:y:2009:i:1:p:19-24

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