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Option valuation under double exponential jump with stochastic intensity, stochastic interest rates and Markov regime-switching stochastic volatility

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  • Yong Ma
  • Li Chen
  • Jianping Lyu

Abstract

In this paper, we present a double exponential jump-diffusion option pricing model with stochastic interest rates, stochastic volatility, and stochastic jump intensity. In addition, Markov regime-switching is introduced to modulate the mean-reverting level of the squared volatility. We obtain the analytical pricing formulae for European options under this model. Finally, we use numerical examples to explore the effects of the regime-switching, stochastic jump intensity and the distribution of jump size on the option price or (and) the implied volatility.

Suggested Citation

  • Yong Ma & Li Chen & Jianping Lyu, 2023. "Option valuation under double exponential jump with stochastic intensity, stochastic interest rates and Markov regime-switching stochastic volatility," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 52(7), pages 2043-2056, April.
    • Handle: RePEc:taf:lstaxx:v:52:y:2023:i:7:p:2043-2056
    DOI: 10.1080/03610926.2021.1944214
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    Cited by:

    1. Guo, Jingjun & Kang, Weiyi & Wang, Yubing, 2024. "Multi-perspective option price forecasting combining parametric and non-parametric pricing models with a new dynamic ensemble framework," Technological Forecasting and Social Change, Elsevier, vol. 204(C).

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