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1 results

  • The Markov Chain Market

  • Ragnar Norberg
  • Journal:
    ASTIN Bulletin: The Journal of the IAA / Volume 33 / Issue 2 / November 2003
    Published online by Cambridge University Press:
    17 April 2015, pp. 265-287
    Print publication:
    November 2003
    • Article
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  • 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.