Markov-Modulated Models for Derivatives Pricing

@inproceedings{McKinlay2009MarkovModulatedMF,
  title={Markov-Modulated Models for Derivatives Pricing},
  author={Shaun McKinlay},
  year={2009}
}
The aim of this thesis is to investigate the mathematics of Markov-modulated models for derivatives pricing. We consider a model where instantaneous stock volatility and drift are driven by a continuous time finite Markov chain. We present a new derivation of an integral representation for attainable non-path dependent options’ prices in a twostate and three-state Markov chain model, and compute three of the Greeks in a two-state model. We find that occupation time distributions of Markov… CONTINUE READING
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