Hedging for the Regime-Switching Price Model Based on Non-Extensive Statistical Mechanics

Abstract

To describe the movement of asset prices accurately, we employ the non-extensive statistical mechanics and the semi-Markov process to establish an asset price model. The model can depict the peak and fat tail characteristics of returns and the regime-switching phenomenon of macroeconomic system. Moreover, we use the risk-minimizing method to study the hedging problem of contingent claims and obtain the explicit solutions of the optimal hedging strategies.

Nonadditive Entropies and Complex Systems

“…Ibrahim et al [ 34 ] perform an analytic study of complex fractional entropy and apply it to complex neural networks. Zhao et al [ 35 ] discuss the hedging for the regime-switching price model based on nonextensive statistical mechanics. Cetin et al [ 36 ] verify a generalised Pesin-like identity and scaling relations at the chaos threshold of the Rössler ordinary differential equations in all three of its continuous variables.…”