Regime-Switching Risk: To Price or Not to Price?

Regime-Switching Risk: To Price or Not to Price?

Should the regime-switching risk be priced? This is perhaps one of the important “normative” issues to be addressed in pricing contingent claims under a Markovian, regime-switching, BlackScholes-Merton model. We address this issue using a minimal relative entropy approach. Firstly, we apply a martingale representation for a double martingale to characterize the canonical space of equivalent mar...

Non-Linear Relationships Among Oil Price, Gold Price and Stock Market Returns in Iran: A Multivariate Regime-Switching Approach

In this paper, the effects of oil and gold prices on stock market index are investigated. We use a cointegrated vector autoregressive Markov-switching model to examine the nonlinear properties of these three variables during the period of January 2003 - December 2014. The Markov-switching vector-equilibrium-correction model with three regimes representing "deep recession", "mild recession" and ...

Power Prices – A Regime - Switching Spot / Forward Price Model

Price Fluctuations: To Buy or to Rent

We extend the classic online ski rental problem, so that the rental price may change over time. We consider several models which differ in the knowledge given to the algorithm: whereas the price development is unknown, an algorithm may have full, partial or no knowledge about the duration of the game. We construct algorithms whose competitive ratios are up to constant or logarithmic factors opt...

Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs

In many markets, Žrms can price discriminate between their own customers and their rivals’ customers, charging one price to consumers who prefer their own product and another price to consumers who prefer a rival’s product. We Žnd that when demand is symmetric, charging a lower price to a rival’s customers is always optimal. When demand is asymmetric, however, it may be more proŽtable to charge...