Rainbow Options with MS–VAR process
Keywords:Rainbow and lookback options, Bayesian MS-VAR process, locally risk-minimizing strategy
This paper presents pricing and hedging methods for rainbow options and lookback options under Markov-Switching Vector Autoregressive (MS–VAR) process. Here we assumed that a regime–switching process is generated by a homogeneous Markov
process. An advantage of our model is it depends on economic variables and simple as compared with previous existing papers.
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