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Conditional coherent risk measures and regime-switching conic pricing

The authors would like to thank the Australian Research Council and NSERC for continuing support. The authors are also grateful to the referees for carefully reviewing the manuscript and providing valuable feedback.

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  • This paper introduces and represents conditional coherent risk measures as essential suprema of conditional expectations over a convex set of probability measures and as distorted expectations given a concave distortion function. A model is then developed for the bid and ask prices of a European-type asset by a conic formulation. The price process is governed by a modified geometric Brownian motion whose drift and diffusion coefficients depend on a Markov chain. The bid and ask prices of a European-type asset are then characterized using conic quantization.

    Mathematics Subject Classification: 60J27, 91G70, 91J20.

    Citation:

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