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Pricing And Filtering In A Two-Dimensional Dividend Switching Model

Author

Listed:
  • PAVEL V. GAPEEV

    (London School of Economics, Department of Mathematics, Houghton Street, London WC2A 2AE, United Kingdom)

  • MONIQUE JEANBLANC

    (Université d'Évry-Val-d'Essonne, Département de Mathématiques, rue Jarlan, F-91025 Évry Cedex, France;
    Europlace Institute of Finance, France)

Abstract

We study a model of a financial market in which the dividend rates of two risky assets change their initial values to other constant ones at the times at which certain unobservable external events occur. The asset price dynamics are described by geometric Brownian motions with random drift rates switching at exponential random times, that are independent of each other and the constantly correlated driving Brownian motions. We obtain closed form expressions for the rational values of European contingent claims through the filtering estimates of occurrence of the switching times and their conditional probability density derived given the filtration generated by the underlying asset price processes.

Suggested Citation

  • Pavel V. Gapeev & Monique Jeanblanc, 2010. "Pricing And Filtering In A Two-Dimensional Dividend Switching Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(07), pages 1001-1017.
    • Handle: RePEc:wsi:ijtafx:v:13:y:2010:i:07:n:s021902491000608x
    DOI: 10.1142/S021902491000608X
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