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On the Price of Risk Under a Regime Switching CGMY Process

Pious Asiimwe (), Charles Wilson Mahera () and Olivier Menoukeu-Pamen ()
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Pious Asiimwe: University of Dar es Salaam
Charles Wilson Mahera: African Institute of Mathematical Sciences
Olivier Menoukeu-Pamen: University of Liverpool

Asia-Pacific Financial Markets, 2016, vol. 23, issue 4, 305-335

Abstract: Abstract In this paper, we study option pricing under a regime-switching exponential Lévy model. Assuming that the coefficients are time-dependent and modulated by a finite state Markov chain, we generalise the work in Momeya and Morales (Method Comput Appl Probab, 2014, doi: 10.1007/s11009-014-9399-2 ), and Siu and Yang (Acta Mathe Appl Sin 2:369–388, 2009), that is, we use a pricing method based on the Esscher transform conditional on the information available on the Markov chain. We also carry out numerical analysis, to show the impact of the risk induced by the underlying Markov chain on the price of the option.

Keywords: Option pricing; Regime switching risk; Exponential Lévy model; Regime switching Esscher transform; 91G60; 91G20; 60G44; 60G51 (search for similar items in EconPapers)
Date: 2016
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