This paper employs a parametric model of persistent (level) shifts in the conditional mean of stock market returns which are endogenously driven by large positive or negative return shocks. These shocks can be taken to reflect important market announcements, monetary policy regime changes and/or...

In this paper we develop a discrete-time pricing model for European options where the log-return of the underlying asset is subject to discontinuous regime shifts in its mean and/or volatility which follow a Markov chain. The model allows for multiple regime shifts whose risk cannot be hedge out...