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Pricing and filtering in a two-dimensional dividend switching model

By Pavel V. Gapeev and Monique Jeanblanc

Abstract

We study a model of a financial market in which the dividend rates of two risky assets change their initial values to other constant ones at the times at which certain unobservable external events occur. The asset price dynamics are described by geometric Brownian motions with random drift rates switching at exponential random times, that are independent of each other and the constantly correlated driving Brownian motions. We obtain closed form expressions for the rational values of European contingent claims through the filtering estimates of occurrence of the switching times and their conditional probability density derived given the filtration generated by the underlying asset price processes

Topics: HG Finance, QA Mathematics
Publisher: World Scientific Publishing Co. Pte. Ltd.
Year: 2010
DOI identifier: 10.1142/S021902491000608X
OAI identifier: oai:eprints.lse.ac.uk:33282
Provided by: LSE Research Online
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