Journal article

Publication year: 2018

Pages: 116-126

Journal: Statistics and Probability Letters

Volume number: 138

ISSN: 0167-7152

eISSN: 1879-2103

Open access status: Green

DOI Link: https://doi.org/10.1016/j.spl.2018.02.056

Publisher: Elsevier

Abstract: 
We consider a regime switching stochastic volatility model where the stock volatility dynamics is a semi-Markov modulated square root mean reverting process. Under this model assumption, we find the locally risk minimizing price of European type vanilla options. The price function is shown to satisfy a non-local degenerate parabolic PDE which can be viewed as a generalization of the Heston PDE. The related Cauchy problem involving the PDE is shown to be equivalent to an integral equation (IE). The existence and uniqueness of solution to the PDE is carried out by studying the IE and using the semigroup theory. (C) 2018 Elsevier B.V. All rights reserved.

Harvard Citation style: Biswas, A., Goswami, A. and Overbeck, L. (2018) Option pricing in a regime switching stochastic volatility model, Statistics and Probability Letters, 138, pp. 116-126. https://doi.org/10.1016/j.spl.2018.02.056

APA Citation style: Biswas, A., Goswami, A., & Overbeck, L. (2018). Option pricing in a regime switching stochastic volatility model. Statistics and Probability Letters. 138, 116-126. https://doi.org/10.1016/j.spl.2018.02.056