Stochastic DDM with regime–switching process

Abstract

This paper introduces a stochastic dividend discount model with regime–switching and conditional heteroscedasticity. We obtain formulas, corresponding to a default probability and $ \ell $-th moment of a random stock price of a company. Next, we connect option pricing, hedging, and equity–linked life insurance products to the stochastic dividend discount model. Also, the paper provides maximum likelihood estimators of parameters of the stochastic dividend discount model. Finally, we present numerical results for the equity–linked life insurance products in the case of Walmart.