Financial Applications of Bivariate Markov Processes

This paper describes a methodology to approximate a bivariate Markov process by means of a proper Markov chain and presents possible �nancial applications in portfolio theory, option pricing and risk management. In particular, we �rst show how to model the joint distribution between market stochastic bounds and future wealth and propose an application to large-scale portfolio problems. Secondly, we examine an application to VaR estimation. Finally, we propose a methodology to price Asian options using a bivariate Markov process.