A Markov-modulated model for stocks paying discrete dividends |
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Authors: | E Sakkas H Le |
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Institution: | aSchool of Mathematical Sciences, University of Nottingham, Nottingham NG7 2RD, UK |
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Abstract: | We extend the model in Korn, R., Rogers, L.C.G., 2005. Stock paying discrete dividends: modelling and option pricing. Journal of Derivatives 13, 44–49] for (discrete) dividend processes to incorporate the dependence of assets on the market mode or the state of the economy, where the latter is modeled by a hidden finite-state Markov chain. We then derive the resulting dynamics of the stock price and various option-pricing formulae. It turns out that the stock price jumps not only at the time of the dividend payment, but also when the underlying Markov chain jumps. |
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Keywords: | Option pricing Hidden Markov chain Dividend |
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