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On the Price of Risk Under a Regime Switching CGMY Process

Author

Listed:
  • Pious Asiimwe

    (University of Dar es Salaam)

  • Charles Wilson Mahera

    (African Institute of Mathematical Sciences)

  • Olivier Menoukeu-Pamen

    (University of Liverpool)

Abstract

In this paper, we study option pricing under a regime-switching exponential Lévy model. Assuming that the coefficients are time-dependent and modulated by a finite state Markov chain, we generalise the work in Momeya and Morales (Method Comput Appl Probab, 2014, doi: 10.1007/s11009-014-9399-2 ), and Siu and Yang (Acta Mathe Appl Sin 2:369–388, 2009), that is, we use a pricing method based on the Esscher transform conditional on the information available on the Markov chain. We also carry out numerical analysis, to show the impact of the risk induced by the underlying Markov chain on the price of the option.

Suggested Citation

  • Pious Asiimwe & Charles Wilson Mahera & Olivier Menoukeu-Pamen, 2016. "On the Price of Risk Under a Regime Switching CGMY Process," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(4), pages 305-335, December.
    • Handle: RePEc:kap:apfinm:v:23:y:2016:i:4:d:10.1007_s10690-016-9219-5
    DOI: 10.1007/s10690-016-9219-5
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    References listed on IDEAS

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