Good-deal bounds in a regime-switching diffusion market

Details Good-deal bounds in a regime-switching diffusion market Good-deal bounds in a regime-switching diffusion market

2010-06-11

arxiv.org/abs/1006.2273v2

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

We consider option pricing in a regime-switching diffusion market. As the market is incomplete, there is no unique price for a derivative. We apply the good-deal pricing bounds idea to obtain ranges for the price of a derivative. As an illustration, we calculate the good-deal pricing bounds for a European call option and we also examine the stability of these bounds when we change the generator of the Markov chain which drives the regime-switching. We find that the pricing bounds depend strongly on the choice of the generator.

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