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Convergence of estimated option price in a regime switching market

Author

Listed:
  • Anindya Goswami

    (IISER)

  • Sanket Nandan

    (IISER)

Abstract

In an observed semi-Markov regime, estimation of transition rate of regime switching leads towards calculation of locally risk minimizing option price. Despite the uniform convergence of estimated step function of transition rate, to meet the existence of classical solution of the modified price equation, the estimator is approximated in the class of smooth functions and furthermore, the convergence is established. Later, the existence of the solution of the modified price equation is verified and the point-wise convergence of such approximation of option price is proved to answer the tractability of its application in Finance. To demonstrate the consistency in result a numerical experiment has been reported.

Suggested Citation

  • Anindya Goswami & Sanket Nandan, 2016. "Convergence of estimated option price in a regime switching market," Indian Journal of Pure and Applied Mathematics, Springer, vol. 47(2), pages 169-182, June.
    • Handle: RePEc:spr:indpam:v:47:y:2016:i:2:d:10.1007_s13226-016-0182-7
    DOI: 10.1007/s13226-016-0182-7
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    References listed on IDEAS

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    1. Brahim Ouhbi & Nikolaos Limnios, 1999. "Nonparametric Estimation for Semi-Markov Processes Based on its Hazard Rate Functions," Statistical Inference for Stochastic Processes, Springer, vol. 2(2), pages 151-173, May.
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    Cited by:

    1. Milan Kumar Das & Anindya Goswami & Sharan Rajani, 2023. "Inference of Binary Regime Models with Jump Discontinuities," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 85(1), pages 49-86, May.

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