Option Pricing and Hedging for Discrete Time Autoregressive Hidden Markov Model

  title={Option Pricing and Hedging for Discrete Time Autoregressive Hidden Markov Model},
  author={Massimo Caccia and B. R{\'e}millard},
  journal={Risk Management eJournal},
  • Massimo Caccia, B. Rémillard
  • Published 2017
  • Computer Science, Economics
  • Risk Management eJournal
  • In this paper we solve the discrete time mean-variance hedging problem when asset returns follow a multivariate autoregressive hidden Markov model. Time dependent volatility and serial dependence are well established properties of financial time series and our model covers both. To illustrate the relevance of our proposed methodology, we first compare the proposed model with the well-known hidden Markov model via likelihood ratio tests and a novel goodness-of-fit test on the S&P 500 daily… CONTINUE READING


    Publications referenced by this paper.
    The Pricing of Options and Corporate Liabilities
    • 24,970
    • Highly Influential
    • PDF
    Theory of Rational Option Pricing
    • 6,844
    • PDF
    A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle
    • 7,627
    • PDF
    Dividend yields and expected stock returns
    • 3,409
    Why Does Stock Market Volatility Change Over Time?
    • 3,267
    • PDF
    The valuation of options for alternative stochastic processes
    • 2,814
    • PDF
    Evaluating Density Forecasts with Applications to Financial Risk Management
    • 1,330
    • PDF
    Variance-Optimal Hedging in Discrete Time
    • 310
    • PDF
    Analysis of time series subject to changes in regime
    • 1,790
    The Price of a Smile: Hedging and Spanning in Option Markets
    • 230
    • PDF