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The Markov chain market

Norberg, Ragnar (2003) The Markov chain market. Astin Bulletin, 33 (2). pp. 265-287. ISSN 0515-0361

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Identification Number: 10.2143/AST.33.2.503693


We consider a financial market driven by a continuous time homogeneous Markov chain. Conditions for absence of arbitrage and for completeness are spelled out, non-arbitrage pricing of derivatives is discussed, and details are worked out for some cases. Closed form expressions are obtained for interest rate derivatives. Computations typically amount to solving a set of first order partial differential equations. An excursion into risk minimization in the incomplete case illustrates the matrix techniques that are instrumental in the model.

Item Type: Article
Official URL:
Additional Information: © 2003 Peeters
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Date Deposited: 10 Jul 2008 13:43
Last Modified: 16 Oct 2021 23:07

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