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Heston‐Type Stochastic Volatility with a Markov Switching Regime

Robert J. Elliott, Katsumasa Nishide and Carlton‐James U. Osakwe

Journal of Futures Markets, 2016, vol. 36, issue 9, 902-919

Abstract: We construct a Heston‐type stochastic volatility model with a Markov switching regime to price a plain‐vanilla stock option. A semi‐analytic solution, which contains a matrix ODE is obtained and numerically calculated. Our model is flexible enough to provide a wide variety of volatility surfaces for the same volatility level but different regimes. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:902–919, 2016

Date: 2016
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