A risk-based approach for pricing American options under a generalized Markov regime-switching model

摘要

This paper considers a risk-based approach for pricing an American contingent claim in an incomplete market described by a continuous-time, Markov, regime-switching jump-diffusion model. We formulate the valuation problem as a stochastic differential game and use dynamic programming. Verification theorems for the Hamilton-Jacobi-Bellman-Issacs (HJBI) variational inequalities of the games are used to determine the seller's and buyer's prices and optimal exercise strategies.