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On pricing barrier control in a regime-switching regulated market

Zheng Han, Yaozhong Hu and Chihoon Lee

Quantitative Finance, 2019, vol. 19, issue 3, 491-499

Abstract: We study a pricing barrier control problem in a regime-switching regulated market. In doing so, we analyze a class of one-dimensional reflected regime-switching diffusion processes. Such diffusion models arise as the key approximating processes in a regulated financial market system with the presence of regime changes. Our main goal is to determine optimal pricing barriers as solutions of long-run average mean–variance optimization problems. More precisely, the optimal barrier, if exists, will be to maximize the long-run average expected return (i.e. steady-state mean) subject to a selected level of long-run average risk (i.e. steady-state variance).

Date: 2019
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Handle: RePEc:taf:quantf:v:19:y:2019:i:3:p:491-499