Artikel

Saddlepoint method for pricing European options under Markov-switching Heston's stochastic volatility model

This paper evaluates the prices of European-style options when dynamics of the underlying asset is assumed to follow a Markov-switching Heston's stochastic volatility model. Under this framework, the expected return and the long-term mean of the variance of the underlying asset rely on states of the economy modeled by a continuous-time Markov chain. There is evidence that the Markov-switching Heston's stochastic volatility model performs well in capturing major events affecting price dynamics. However, due to the nature of the model, analytic solutions for the prices of options or other financial derivatives do not exist. By means of the saddlepoint method, an analytic approximation for European-style option price is presented. The saddlepoint method gives an effective approximation to option prices under the Markov-switching Heston's stochastic volatility model.

Language
Englisch

Bibliographic citation
Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 15 ; Year: 2022 ; Issue: 9 ; Pages: 1-9

Classification
Management
Subject
European-style options
Markov chain
Markov-switching Heston’
s stochastic volatility model
saddlepoint method

Event
Geistige Schöpfung
(who)
Zhang, Mengzhe
Chan, Leunglung
Event
Veröffentlichung
(who)
MDPI
(where)
Basel
(when)
2022

DOI
doi:10.3390/jrfm15090396
Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Artikel

Associated

  • Zhang, Mengzhe
  • Chan, Leunglung
  • MDPI

Time of origin

  • 2022

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