Option Pricing and Hedging for Discrete Time Autoregressive Hidden Markov Model

@article{Caccia2017OptionPA,
  title={Option Pricing and Hedging for Discrete Time Autoregressive Hidden Markov Model},
  author={Massimo Caccia and B. R{\'e}millard},
  journal={Risk Management eJournal},
  year={2017}
}
  • 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

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