Pricing VIX option under Heston stochastic volatility model with regime switching
WANG Cheng-xiang1, LI Sheng-hong1, HU Wen-bin1, LIU Gui-mei2
1. Department of Mathematics, Zhejiang University, Hangzhou 310027, China
2. Department of
Mathematics, Zhejiang University City College, Hangzhou 310027, China
Abstract A new model has been developed for pricing the VIX option under a continuous Markov-modulated version of the stochastic volatility model. This paper supposes that the model parameters depend on the states of a continuous time observable Markov chain process, which is the state of an observable macroeconomics factor. The VIX call option pricing formula has also been derived in this paper. Compared with the conventional stochastic volatility model, the pricing formula derived in this paper concludes the regime switching risk premium. The last part is the Monte Carlo simulation and some explanations for the numerical results.
WANG Cheng-xiang, LI Sheng-hong, HU Wen-bin, LIU Gui-mei. Pricing VIX option under Heston stochastic volatility model with regime switching. Applied Mathematics A Journal of Chinese Universities, 2015, 30(3): 347-354.
