Abstract
There have been profound ideas on how to measure risk which have influenced the financial market. Shortfall risk minimization is one of the methods which has attracted considerable attention. This problem has been studied for the binomial model in Runggaldier and Zaccaria (2000) and Runggaldier, Trivellato and Vargiolu (2002) and for the trinomial model in Scagnelatto and Vargiolu (2002). In this paper, we investigate shortfall risk minimization in a discrete regime switching model. In the model, we have two possible regimes, which are both binomial. To fix ideas, we can think of the second regime as being the consequence of the presence of inside information, but this can also be due to other factors. Explicit solutions for one-period models are given.
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