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Document Details : Title: The Markov Chain Market Author(s): NORBERG, Ragnar Journal: ASTIN Bulletin Volume: 33 Issue: 2 Date: November 2003 Pages: 265-287 DOI: 10.2143/AST.33.2.503693 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. |
