Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83492
Authors: 
Lux, Thomas
Year of Publication: 
2013
Series/Report no.: 
Kiel Working Paper 1871
Abstract: 
This paper shows how exact solutions for the transient density of a large class of continuous-time Markov switching models can be obtained. We illustrate the pertinent approach for both simple diffusion models with a small number of regimes as well as for the more complicated so-called Poisson multifractal model introduced by Calvet and Fisher (2001) with an arbitrarily large number of regimes. Our results can be immediately applied as well to various popular Markov switching models in financial economics. Closed-form solutions provide for the possibility of exact maximum likelihood estimation for discretely sampled Markov-switching diffusions and also facilitate the use of such models in applied tasks such as option pricing and portfolio management.
Subjects: 
regime switching
continuous-time models
multifractal models
JEL: 
C13
C58
G12
Document Type: 
Working Paper

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