Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/274917 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 15 [Issue:] 9 [Article No.:] 396 [Year:] 2022 [Pages:] 1-9
Publisher: 
MDPI, Basel
Abstract: 
This paper evaluates the prices of European-style options when dynamics of the underlying asset is assumed to follow a Markov-switching Heston's stochastic volatility model. Under this framework, the expected return and the long-term mean of the variance of the underlying asset rely on states of the economy modeled by a continuous-time Markov chain. There is evidence that the Markov-switching Heston's stochastic volatility model performs well in capturing major events affecting price dynamics. However, due to the nature of the model, analytic solutions for the prices of options or other financial derivatives do not exist. By means of the saddlepoint method, an analytic approximation for European-style option price is presented. The saddlepoint method gives an effective approximation to option prices under the Markov-switching Heston's stochastic volatility model.
Subjects: 
European-style options
Markov chain
Markov-switching Heston&#x2019
s stochastic volatility model
saddlepoint method
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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