TITLE:
Option Pricing with Markov Switching in Uncertainty Markets
AUTHORS:
Guoshuai Wang, Dianli Zhao
KEYWORDS:
Uncertainty Theory, Markov Process, Laplace Transform, Put-Call Parity, Option Pricing
JOURNAL NAME:
Open Journal of Applied Sciences,
Vol.5 No.5,
May
12,
2015
ABSTRACT: In this paper, we present a stock model with Markov switching in the uncertainty markets, where the parameters of drift and volatility change according to the states of a Markov process. To price the option, we firstly establish a risk-neutral probability based on the uncertain measure given by Liu. Then a closed form of the European option pricing formula is obtained by applying the Laplace transforms and the inverse Laplace transforms.