Publication

This paper investigates exact solutions for the transient density of a large class of continuous-time Markov switching models - a mathematical probability model and popular tool in empirical finance. The author illustrates his closed-form approach for both simple diffusion models with a small number of regimes as well as for the more complicated so-called Poisson multifractal model with an arbitrarily large number of regimes. He argues that closed-form solutions allow the exact maximum likelihood estimation for discretely sampled Markov-switching diffusion models and also facilitate the use of such models in applied tasks such as option pricing and portfolio management.