Option Pricing under Double Stochastic Volatility Model with Stochastic Interest Rates and Double Exponential Jumps with Stochastic Intensity

Ying Chang and Yiming Wang

Mathematical Problems in Engineering, 2020, vol. 2020, 1-13

Abstract:

We present option pricing under the double stochastic volatility model with stochastic interest rates and double exponential jumps with stochastic intensity in this article. We make two contributions based on the existing literature. First, we add double stochastic volatility to the option pricing model combining stochastic interest rates and jumps with stochastic intensity, and we are the first to fill this gap. Second, the stochastic interest rate process is presented in the Hull–White model. Some authors have concentrated on hybrid models based on various asset classes in recent years. Therefore, we build a multifactor model with the term structure of stochastic interest rates. We also approximated the pricing formula for European call options by applying the COS method and fast Fourier transform (FFT). Numerical results display that FFT and the COS method are much faster than the numerical integration approach used for obtaining the semi-closed form prices. The COS method shows higher accuracy, efficiency, and stability than FFT. Therefore, we use the COS method to investigate the impact of the parameters in the stochastic jump intensity process and the existence of the process on the call option prices. We also use it to examine the impact of the parameters in the interest rate process on the call option prices.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:2743676

DOI: 10.1155/2020/2743676

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