|Table of Contents|

Two-Factor Markov-Modulated StochasticVolatility Models for Option Pricing(PDF)

《南京师大学报（自然科学版）》[ISSN:1001-4616/CN:32-1239/N]

Issue:
2019年04期
Page:
31-38
Research Field:
·数学与计算机科学·
Publishing date:

Info

Title:
Two-Factor Markov-Modulated StochasticVolatility Models for Option Pricing
Author(s):
Liu Xueru; Li Meihong; Tian Fan; Liu Guoxiang
School of Mathematical Sciences,Nanjing Normal University,Nanjing 210023,China
Keywords:
option pricing; regime switching; Esscher transform; two-factor stochastic volatility; markov chain model
PACS:
O211.9
DOI:
10.3969/j.issn.1001-4616.2019.04.005
Abstract:
We consider the option pricing problem when the risky underlying assets are driven by a two-factor Morkov-modulated stochastic volatility model,with the first volatility factor driven by the Cox-Ingersoll-Ross process and the second volatility factor driven by a continuous-time hidden Markov process. The states of the Markov process can be interpreted as the unobservable states of the economy. The market described by a two-factor Markov-modulated stochastic volatility model is incomplete in general and,hence,the martingale measure is not unique. We adopt the regime switching Esscher transform to determine an equivalent martingale pricing measure. We consider the valuation of the European and American options. A system of coupled partial differential integral equations satisfied by the European option prices in derived. We also derive a decomposition result for an American put option into its European counterpart and early exercise premium. Finally,numerical illustrations are given.

References:

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Last Update: 2019-12-31