Chapter 4: Futures Pricing in a Regime-Switching Market

Asset price dynamics may depend on market regimes, which can change suddenly and persist for a period of time. The timing of regime switching is often unpredictable, thus making hedging and risk management very challenging. In this chapter, we discuss a general regime-switching model to capture such properties of market dynamics. Specifically, an exogenous continuous-time finite-state Markov chain is used to represent the stochastic market regime…