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The Markov chain market

By Ragnar Norberg

Abstract

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

Topics: HG Finance, QA Mathematics
Publisher: Peeters
Year: 2003
DOI identifier: 10.2143/AST.33.2.503693
OAI identifier: oai:eprints.lse.ac.uk:13137
Provided by: LSE Research Online
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