The impact of volatility regime dynamics on option pricing

Shican Liu, Qing Li and Siqi Fan

The North American Journal of Economics and Finance, 2025, vol. 76, issue C

Abstract: This paper explores the joint impact of stochastic volatility and Markov regime switches on option pricing. Our findings suggest that the interaction between different regimes of stochastic volatility can be adequately captured by expanding the option price asymptotically to the second order. Through our sensitivity analysis, we demonstrate the significance of the volatility level, as reflected in the second order term, in explaining the regime shift in option pricing. Furthermore, numerical and empirical experiments indicate that the adjusted closed-form formula can enhance the accuracy and efficiency of at-the-money option pricing, increasing its viability for practical applications.

Keywords: Volatility risk; Markov regime switching; Regime interaction; Option pricing (search for similar items in EconPapers)
JEL-codes: C02 C58 G12 G13 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940824002778
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:76:y:2025:i:c:s1062940824002778

DOI: 10.1016/j.najef.2024.102352

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().