A new nonlinear stochastic volatility model with regime switching stochastic mean reversion and its applications to option pricing

• Published in: Expert systems with applications Vol. 212; p. 118742
• Main Authors: He, Xin-Jiang, Lin, Sha
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.02.2023
• Subjects: Closed-form solution; European option; Nonlinearity; Regime switching; Stochastic volatility; Stochastic volatility; Nonlinearity; Closed-form solution; Regime switching; European option

We establish a new nonlinear stochastic volatility model by modeling the volatility long-run mean with a particular stochastic process, whose parameters can jump between different regimes according to a Markov chain. Introducing the regime switching factor is consistent with the empirical evidence o...