A generalized Esscher transform for option valuation with regime switching risk

Elliott, Robert J.; Siu, Tak Kuen

doi:10.1080/14697688.2021.2005251

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2023

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Cited by 2 publications

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“…0) ∈ R N . Here, we take the usual practice of Elliott et al [15] and give the following representation form of {ξ t } t∈[0,T] :…”

Section: The Modeling Assumptionsmentioning

confidence: 99%

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Pricing Equity-Indexed Annuities under a Stochastic Dividend Model

Shan

Shu

2023

Mathematics

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In this paper, we examine the valuations of equity-indexed annuities (EIAs) when their reference stocks distribute stochastic dividends. Due to the fact that stocks typically pay dividends at discrete times after the payment dates are announced, pricing EIAs with dividends is deemed to be practically significant. We directly model the discrete dividend payments using the jump diffusion process with regime switching, and then determine the dynamics of the stock price. The equivalent martingale measure of fair valuation in incomplete markets is determined by employing the Esscher transform. Finally, the pricing formulas of several of the most common EIAs in the market under the stochastic dividend model are obtained. Our model incorporates and extends the present literature on EIAs with accurate and effective valuation methods.

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“…0) ∈ R N . Here, we take the usual practice of Elliott et al [15] and give the following representation form of {ξ t } t∈[0,T] :…”

Section: The Modeling Assumptionsmentioning

confidence: 99%

“…However, the market in our model becomes incomplete due to the additional risk, which implies that there are many martingale pricing measures. To explore fair valuation, we take into account the method of Esscher transform (see, [15][16][17]) to find a martingale pricing measure.…”

Section: Introductionmentioning

confidence: 99%