Good-deal bounds in a regime-switching diffusion market
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Fri, 10/02/2012 14:15 |
Catherine Donnelly (Heriot-Watt) |
Nomura Seminar  |
DH 1st floor SR |
| We consider the pricing of a maturity guarantee, which is equivalent to the pricing of a European put option, in a regime-switching market model. Regime-switching market models have been empirically shown to fit long-term stockmarket data better than many other models. However, since a regime-switching market is incomplete, there is no unique price for the maturity guarantee. We extend the good-deal pricing bounds idea to the regime-switching market model. This allows us to obtain a reasonable range of prices for the maturity guarantee, by excluding those prices which imply a Sharpe Ratio which is too high. The range of prices can be used as a plausibility check on the chosen price of a maturity guarantee. | |||