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Conditional expected values in Markov chains are solutions to a set of associated backward differential equations, which may be ordinary or partial depending on the number of relevant state variables. This paper investigates the validity of these differential equations by locating the points of non-smoothness of the state-wise conditional expected values,(More)
We consider a …nancial market driven by a continuous time homogeneous Markov chain. Conditions for absence of arbitrage and for completeness are spelled out, non-arbitrage pricing of derivatives is discussed, and details are worked out for a number of cases. Closed form expressions are obtained for interest rate derivatives. Computations typically amount to(More)
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