scholarly journals Asset Allocation With Markovian Regime Switching: Efficient Frontier and Tangent Portfolio With Regime Switching

2018 ◽  
Author(s):  
Andre Barbosa Oliveira ◽  
Pedro L. Valls Pereira
Keyword(s):  
Asset Allocation ◽  
Regime Switching ◽  
Efficient Frontier ◽  
Markovian Regime Switching ◽  
Markovian Regime

A martingale approach for asset allocation with derivative security and hidden economic risk

2019 ◽  
Vol 56 (3) ◽  
pp. 723-749 ◽  
Author(s):  
Tak Kuen Siu ◽  
Jinxia Zhu ◽  
Hailiang Yang
Keyword(s):  
Asset Allocation ◽  
Regime Switching ◽  
Power Utility ◽  
Martingale Approach ◽  
Economic Implications ◽  
Logarithmic Utility ◽  
General Utility ◽  
State Process ◽  
Markovian Regime Switching ◽  
Markovian Regime

AbstractAsset allocation with a derivative security is studied in a hidden, Markovian regime-switching, economy using filtering theory and the martingale approach. A generalized delta-hedged ratio and a generalized elasticity of an option are introduced to accommodate the presence of the information state process and the derivative security. Malliavin calculus is applied to derive a solution for a general utility function which includes an exponential utility, a power utility, and a logarithmic utility. A compact solution is obtained for a logarithmic utility. Some economic implications of the solutions are discussed.

ROBUST STABILITY, STABILISATION AND H-INFINITY CONTROL FOR PREMIUM-RESERVE MODELS IN A MARKOVIAN REGIME SWITCHING DISCRETE-TIME FRAMEWORK

2016 ◽  
Vol 46 (3) ◽  
pp. 747-778 ◽  
Author(s):  
Lin Yang ◽  
Athanasios A. Pantelous ◽  
Hirbod Assa
Keyword(s):  
Discrete Time ◽  
Regime Switching ◽  
Structural Changes ◽  
Linear Matrix ◽  
H Infinity Control ◽  
R Process ◽  
The Stability ◽  
Markovian Regime Switching ◽  
Markovian Regime

AbstractThe premium pricing process and the medium- and long-term stability of the reserve policy under conditions of uncertainty present very challenging issues in relation to the insurance world. Over the last two decades, applications of Markovian regime switching models to finance and macroeconomics have received strong attention from researchers, and particularly market practitioners. However, relatively little research has so far been carried out in relation to insurance. This paper attempts to consider how a linear Markovian regime switching system in discrete-time could be applied to model the medium- and long-term reserves and the premiums (abbreviated here as the P-R process) for an insurer. Some recently developed techniques from linear robust control theory are applied to explore the stability, stabilisation and robust H∞-control of a P-R system, and the potential effects of abrupt structural changes in the economic fundamentals, as well as the insurer's strategy over a finite time period. Sufficient linear matrix inequality conditions are derived for solving the proposed sub-problems. Finally, a numerical example is presented to illustrate the applicability of the theoretical results.

A RECOMBINING TREE METHOD FOR OPTION PRICING WITH STATE-DEPENDENT SWITCHING RATES

2016 ◽  
Vol 19 (02) ◽  
pp. 1650012 ◽  
Author(s):  
J. X. JIANG ◽  
R. H. LIU ◽  
D. NGUYEN
Keyword(s):  
Option Pricing ◽  
Regime Switching ◽  
Asset Price ◽  
Numerical Results ◽  
Price Process ◽  
State Dependent ◽  
Switching Models ◽  
Markovian Regime Switching ◽  
Tree Method ◽  
Markovian Regime

This paper develops simple and efficient tree approaches for option pricing in switching jump diffusion models where the rates of switching are assumed to depend on the underlying asset price process. The models generalize many existing models in the literature and in particular, the Markovian regime-switching models with jumps. The proposed trees grow linearly as the number of tree steps increases. Conditions on the choices of key parameters for the tree design are provided that guarantee the positivity of branch probabilities. Numerical results are provided and compared with results reported in the literature for the Markovian regime-switching cases. The reported numerical results for the state-dependent switching models are new and can be used for comparison in the future.

scholarly journals Pricing Exotic Options under a High-Order Markovian Regime Switching Model

2007 ◽  
Vol 2007 ◽  
pp. 1-15 ◽  
Author(s):  
Wai-Ki Ching ◽  
Tak-Kuen Siu ◽  
Li-Min Li
Keyword(s):  
Regime Switching ◽  
Order Effect ◽  
High Order ◽  
Martingale Measure ◽  
Exotic Options ◽  
Lookback Options ◽  
Path Dependent ◽  
Markovian Regime Switching ◽  
The Impact ◽  
Markovian Regime

We consider the pricing of exotic options when the price dynamics of the underlying risky asset are governed by a discrete-time Markovian regime-switching process driven by an observable, high-order Markov model (HOMM). We assume that the market interest rate, the drift, and the volatility of the underlying risky asset's return switch over time according to the states of the HOMM, which are interpreted as the states of an economy. We will then employ the well-known tool in actuarial science, namely, the Esscher transform to determine an equivalent martingale measure for option valuation. Moreover, we will also investigate the impact of the high-order effect of the states of the economy on the prices of some path-dependent exotic options, such as Asian options, lookback options, and barrier options.

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