CHINESE JOURNAL OF APPLIED PROBABILITY AND STATIST 2015, 31(4) 357-366 DOI:      ISSN: 1001-4268 CN: 31-1256

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Pricing Derivatives under a Markov Skeleton Process

Jia Zhaoli, Zhang Fan, Zhang Shuguang

School of Mathematics, Hefei University of Technology; Department of Statistics and Finance, University of Science and Technology of China

Abstract��

In this paper, it is assumed that the underlying is a Markov
skeleton process (abbreviated MSP): this process can be better reflecting the instability
of the financial market. Using the properties of Markov skeleton process, the characteristic
function of the price process is given, combined with fast Fourier transform (FFT) method,
the pricing formula of derivatives under the Markov skeleton process is given. The results
of this paper can be applied to price other financial derivatives, and it enriching the
pricing theory of financial derivatives.

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