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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
Abstract 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