Option Pricing for Pure Jump Processes with Markov Switching Compensators

Robert J. Elliott () and Carlton-James U. Osakwe ()
Additional contact information
Robert J. Elliott: University of Calgary
Carlton-James U. Osakwe: University of Calgary

Finance and Stochastics, 2006, vol. 10, issue 2, No 5, 250-275

Abstract: Abstract This paper proposes a model for asset prices which is the exponential of a pure jump process with an N-state Markov switching compensator. We argue that such a process has a good chance of capturing all the empirical stylized regularities of stock price dynamics and we provide a closed form representation of its characteristic function. We also provide a parsimonious representation of the (not necessarily unique) risk neutral density and show how to price and hedge a large class of options on assets whose prices follow this process.

Keywords: Jump process; Markov switching; Compensator; Characteristic function; European options; Hedging; 91B28; 60G10; 60G44; 60G51 (search for similar items in EconPapers)
JEL-codes: D52 G12 G13 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-006-0004-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:10:y:2006:i:2:d:10.1007_s00780-006-0004-6

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-006-0004-6

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().