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A unified option pricing model with Markov regime-switching double stochastic volatility, stochastic interest rate and jumps

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  • Jianping Lyu
  • Yong Ma
  • Wei Sun

Abstract

We consider a general option pricing framework incorporating the double Heston stochastic volatility, stochastic interest rate, jumps and Markov regime switching. Under the proposed framework, we derive the analytical pricing formulae for European options using Fourier transform technique. Numerical examples illustrate that the option prices and the implied volatility curves under different regimes vary clearly, and the effects of regime-switching and jumps on the option price differ.

Suggested Citation

  • Jianping Lyu & Yong Ma & Wei Sun, 2022. "A unified option pricing model with Markov regime-switching double stochastic volatility, stochastic interest rate and jumps," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 51(15), pages 5112-5123, June.
    • Handle: RePEc:taf:lstaxx:v:51:y:2022:i:15:p:5112-5123
    DOI: 10.1080/03610926.2020.1833221
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