Before revision: We analyze pricing and portfolio optimization problems in defaultable regime switching markets. We contribute to both of these problems by obtaining novel characterizations of option prices and optimal portfolio strategies under regime-switching . Using our option price representation, we develop a novel efficient method to price claims which may depend on the full path of the underlying Markov chain.
After revision: Using a suitable change of probability measure, we obtain a novel Poisson series representation for the arbitrage- free price process of vulnerable contingent claims in a regime-switching . Using our option price representation, we develop a novel efficient method to price claims which may depend on the full path of the underlying Markov chain.