A Markov-modulated model for stocks paying discrete dividends

We extend the model in [Korn, R., Rogers, L.C.G., 2005. Stock paying discrete dividends: modelling and option pricing. Journal of Derivatives 13, 44–49] for (discrete) dividend processes to incorporate the dependence of assets on the market mode or the state of the economy, where the latter is modeled by a hidden finite-state Markov chain. We then derive the resulting dynamics of the stock price and various option-pricing formulae. It turns out that the stock price jumps not only at the time of the dividend payment, but also when the underlying Markov chain jumps.