Abstract
This paper proposes a model for asset prices which is the exponential of a pure jump process with an N-state Markov switching compensator. We argue that such a process has a good chance of capturing all the empirical stylized regularities of stock price dynamics and we provide a closed form representation of its characteristic function. We also provide a parsimonious representation of the (not necessarily unique) risk neutral density and show how to price and hedge a large class of options on assets whose prices follow this process.
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Elliott, R.J., Osakwe, CJ.U. Option Pricing for Pure Jump Processes with Markov Switching Compensators. Finance Stochast. 10, 250–275 (2006). https://doi.org/10.1007/s00780-006-0004-6
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DOI: https://doi.org/10.1007/s00780-006-0004-6