Asset Pricing Using Trading Volumes in a Hidden Regime-Switching Environment
Robert Elliott () and
Tak Kuen Siu
Asia-Pacific Financial Markets, 2015, vol. 22, issue 2, 133-149
By utilizing information about prices and trading volumes, we discuss the pricing of European contingent claims in a continuous-time hidden regime-switching environment. Hidden market sentiments described by the states of a continuous-time, finite-state, hidden Markov chain represent a common factor for an asset’s drift and volatility, as well as its trading volumes. Using observations about trading volumes, we present a filtered estimate of the hidden common factor. The asset pricing problem is then considered in a filtered market, where the hidden drift and volatility are replaced by their filtered estimates. We adopt the Esscher transform to select an equivalent martingale measure for pricing and derive a partial-differential integral equation for the option price. Copyright Springer Japan 2015
Keywords: Asset pricing; Trading volumes; Hidden Markov models; Filtering; Esscher transform; PDIE (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:apfinm:v:22:y:2015:i:2:p:133-149
Ordering information: This journal article can be ordered from
Access Statistics for this article
Asia-Pacific Financial Markets is currently edited by Jiro Akahori
More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla ().