<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>The main aim of the paper was to prove that the complete Black-Scholes-Merton regime-switching Lévy market is characterized by an absence of arbitrage. In the considered model, the prices of financial assets are described by the Lévy process in which the coefficients depend on the states of the Markov chain. Such a market is incomplete; in order to complete this market, jump financial instruments and power-jump assets were added. Then, an equivalent martingale measure was indicated and the conditions were determined so that the above model is characterized by the absence of arbitrage. Arbitrage is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms. Thus arbitrage can be understood as risk-free profit for the trader.</p>
</abstract>

The main aim of the paper was to prove that the complete Black-Scholes-Merton regime-switching Lévy market is characterized by an absence of arbitrage. In the considered model, the prices of financial assets are described by the Lévy process in which the coefficients depend on the states of the Markov chain. Such a market is incomplete; in order to complete this market, jump financial instruments and power-jump assets were added. Then, an equivalent martingale measure was indicated and the conditions were determined so that the above model is characterized by the absence of arbitrage. Arbitrage is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms. Thus arbitrage can be understood as risk-free profit for the trader.

The Absence of Arbitrage on the Complete Black-Scholes-Merton Regime-Switching Lévy Market

Wroclaw University of Economics and Business

Department of Econometrics and Operational Research, Faculty of Economics and Finance

Econometrics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The main aim of the paper was to prove that the complete Black-Scholes-Merton regime-switching Lévy market is characterized by an absence of arbitrage. In the...

The Absence of Arbitrage on the Complete Black-Scholes-Merton Regime-Switching Lévy Market

Pubblicato online: 08 ott 2021

Pagine: 72 - 84

DOI: https://doi.org/10.15611/eada.2021.3.04

Parole chiave
Lévy process, regime-switching, arbitrage, martingale measure

© 2021 Anna Sulima, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

The Absence of Arbitrage on the Complete Black-Scholes-Merton Regime-Switching Lévy Market

Pubblicato online: 08 ott 2021

Pagine: 72 - 84

DOI: https://doi.org/10.15611/eada.2021.3.04

Parole chiaveLévy process, regime-switching, arbitrage, martingale measure

© 2021 Anna Sulima, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Parole chiave
Lévy process, regime-switching, arbitrage, martingale measure