Heston‐Type Stochastic Volatility with a Markov Switching Regime | Zendy

Elliott Robert J. | Zendy; Nishide Katsumasa | Zendy; Osakwe CarltonJames U. | Zendy

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Heston‐Type Stochastic Volatility with a Markov Switching Regime

Author(s) -

Elliott Robert J.,

Nishide Katsumasa,

Osakwe CarltonJames U.

Publication year - 2016

Publication title -

journal of futures markets

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.88

H-Index - 55

eISSN - 1096-9934

pISSN - 0270-7314

DOI - 10.1002/fut.21761

Subject(s) - heston model , stochastic volatility , markov chain , volatility (finance) , implied volatility , econometrics , mathematics , ode , economics , volatility smile , sabr volatility model , statistical physics , physics , statistics

We construct a Heston‐type stochastic volatility model with a Markov switching regime to price a plain‐vanilla stock option. A semi‐analytic solution, which contains a matrix ODE is obtained and numerically calculated. Our model is flexible enough to provide a wide variety of volatility surfaces for the same volatility level but different regimes. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:902–919, 2016

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