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A semianalytical formula for European options under a hybrid Heston–Cox–Ingersoll–Ross model with regime switching

Journal Article


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Abstract


  • In this paper, we consider the pricing of European options under a regime-switching Heston–Cox–Ingersoll–Ross (CIR) hybrid model, where the mean-reversion levels of both the stochastic volatility and interest rate are assumed to change among different states. Albeit difficult, we have still managed to derive an semianalytical pricing formula for European options after the generalized moment generating function of this particular model is worked out. Numerical experiments are also carried out to demonstrate the accuracy of the newly derived formula as well as the influence of the introduction of the regime-switching mechanics on option prices. Finally, through a preliminary empirical study, our model is shown to be superior to the Heston-CIR model, which demonstrates the importance of introducing the regime-switching mechanics.

Authors


Publication Date


  • 2019

Citation


  • He, X. & Chen, W. (2019). A semianalytical formula for European options under a hybrid Heston–Cox–Ingersoll–Ross model with regime switching. International Journal of Finance and Economics, Online First 1-10.

Scopus Eid


  • 2-s2.0-85074766025

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=4392&context=eispapers1

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers1/3370

Number Of Pages


  • 9

Start Page


  • 1

End Page


  • 10

Volume


  • Online First

Place Of Publication


  • United Kingdom

Abstract


  • In this paper, we consider the pricing of European options under a regime-switching Heston–Cox–Ingersoll–Ross (CIR) hybrid model, where the mean-reversion levels of both the stochastic volatility and interest rate are assumed to change among different states. Albeit difficult, we have still managed to derive an semianalytical pricing formula for European options after the generalized moment generating function of this particular model is worked out. Numerical experiments are also carried out to demonstrate the accuracy of the newly derived formula as well as the influence of the introduction of the regime-switching mechanics on option prices. Finally, through a preliminary empirical study, our model is shown to be superior to the Heston-CIR model, which demonstrates the importance of introducing the regime-switching mechanics.

Authors


Publication Date


  • 2019

Citation


  • He, X. & Chen, W. (2019). A semianalytical formula for European options under a hybrid Heston–Cox–Ingersoll–Ross model with regime switching. International Journal of Finance and Economics, Online First 1-10.

Scopus Eid


  • 2-s2.0-85074766025

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=4392&context=eispapers1

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers1/3370

Number Of Pages


  • 9

Start Page


  • 1

End Page


  • 10

Volume


  • Online First

Place Of Publication


  • United Kingdom