Asset Pricing in a Semi-Markov Modulated Market with Time-dependent Volatility

Tanmay S. Patankar

Papers from arXiv.org

Abstract: This project attempts to address the problem of asset pricing in a financial market, where the interest rates and volatilities exhibit regime switching. This is an extension of the Black-Scholes model. Studies of Markov-modulated regime switching models have been well-documented. This project extends that notion to a class of semi-Markov processes known as age-dependent processes. We also allow for time-dependence in volatility within regimes. We show that the problem of option pricing in such a market is equivalent to solving a certain integral equation.

Date: 2016-09
New Economics Papers: this item is included in nep-ore
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