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In this paper, we present a stock model with Markov switching in the uncertainty markets, where the parameters of drift and volatility change according to the states of a Markov process. To price the option, we firstly establish a risk-neutral probability based on the uncertain measure given by Liu. Then a closed form of the European option pricing formula is obtained by applying the Laplace transforms and the inverse Laplace transforms.

KEYWORDS

Uncertainty Theory, Markov Process, Laplace Transform, Put-Call Parity, Option Pricing

Cite this paper

Wang, G. and Zhao, D. 2015 Option Pricing with Markov Switching in Uncertainty Markets. Open Journal of Applied Sciences, 5, 191-198. doi: 10.4236-ojapps.2015.55019.





Author: Guoshuai Wang, Dianli Zhao

Source: http://www.scirp.org/



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