Abstract
AbstractWe investigate the valuation of exchange options when the market is affected by changing economic conditions as well as liquidity risks. The volatility and expected returns of both stocks are assumed to be controlled by a continuous‐time Markov chain to reflect the effects of varying economic conditions, and a liquidity discounting factor is employed to capture the impact of market liquidity on stock prices. Once the model has been established, we construct a risk‐neutral measure with the use of regime‐switching Esscher transform, and the characteristic function is then derived in an analytical form, so that a closed‐form formula for exchange options can be presented. We further analyze the effects of the two considered factors on exchange option prices numerically.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
