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Original Articles

Risk Minimizing Option Pricing in a Regime Switching Market

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Pages 313-324 | Received 27 Jun 2007, Accepted 12 Jul 2007, Published online: 10 Mar 2008
 

Abstract

We study option pricing in a regime switching market where the risk free interest rate, growth rate and the volatility of a stock depends on a finite state Markov chain. Using a minimal martingale measure we show that the risk minimizing option price satisfies a system of Black–Scholes partial differential equations with weak coupling.

Mathematics Subject Classification (2000):

This work is supported in part by a DST project: SR/S4/MS: 379/06, and in part by grants from UGC via DSA-SAP Phase IV.

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