Pricing S&P500 barrier put option of American type under Heston–CIR model with regime-switching

Farshid Mehrdoust and Idin Noorani
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Farshid Mehrdoust: Department of Applied Mathematics, Faculty of Mathematical Sciences, University of Guilan, P. O. Box
Idin Noorani: Department of Applied Mathematics, Faculty of Mathematical Sciences, University of Guilan, P. O. Box

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 02, 1-17

Abstract: In this paper, we consider the regime-switching Heston–CIR model, where the parameters of the volatility process are modulated by a Hidden Markov chain and the unobserved regimes. Then, we calibrate the parameters of the volatility and interest rate processes by the expectation maximization (EM) and maximum likelihood estimation (MLE) algorithms, respectively. Next, we use the least square Monte-Carlo (LSM) algorithm to determine the S&P500 American barrier put option under the Heston–CIR model. Finally, by the binomial tree method as a benchmark, we provide some numerical experiments to illustrate the accuracy of the achieved results.

Keywords: American barrier options; Heston–CIR model; regime-switching model; EM algorithm (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S2424786319500142

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