An analytical approximation for European options under a Heston-type model with regime switching

IF 3.9 3区经济学 Q1 BUSINESS, FINANCE

North American Journal of Economics and Finance Pub Date : 2025-07-22 DOI:10.1016/j.najef.2025.102500

Wenting Chen , Xin-Jiang He

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Abstract

In this paper, we consider the pricing of European options under a generalized regime-switching Heston model. By “generalized”, it means that all parameters of the original Heston model are expected to vary among various economic states. This broad assumption regarding regime switching has impeded the application of existing analytical techniques used to calculate European option prices under Heston-type regime-switching models. Albeit difficult, we have managed to derive an analytical approximation for the price of European options with the use of frozen coefficient technique. Remarkably, an error estimation for the approximation has been established theoretically and verified quantitatively through numerical experiments. Finally, through a preliminary empirical study, the current model is shown to be superior to a class of generally used Heston-type models, implying that the present model, together with the newly derived formula, can be safely used in actual financial market for pricing European options expiring in no more than three months.

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带制度切换的heston型模型下欧式期权的解析逼近

本文研究了在广义制度切换赫斯顿模型下欧式期权的定价问题。所谓“普遍化”，是指原赫斯顿模型的所有参数在不同的经济状态下都是不同的。这种关于制度转换的广泛假设阻碍了现有分析技术在赫斯顿型制度转换模型下计算欧洲期权价格的应用。尽管困难重重，我们还是成功地利用冻结系数技术推导出了欧洲期权价格的解析近似。值得注意的是，在理论上建立了近似的误差估计，并通过数值实验进行了定量验证。最后，通过初步的实证研究，本文模型优于一类常用的heston型模型，这意味着本文模型与新导出的公式可以安全地用于实际金融市场中到期不超过3个月的欧式期权定价。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

North American Journal of Economics and Finance Multiple-

CiteScore

7.30

自引率

8.30%

发文量

168

期刊介绍： The focus of the North-American Journal of Economics and Finance is on the economics of integration of goods, services, financial markets, at both regional and global levels with the role of economic policy in that process playing an important role. Both theoretical and empirical papers are welcome. Empirical and policy-related papers that rely on data and the experiences of countries outside North America are also welcome. Papers should offer concrete lessons about the ongoing process of globalization, or policy implications about how governments, domestic or international institutions, can improve the coordination of their activities. Empirical analysis should be capable of replication. Authors of accepted papers will be encouraged to supply data and computer programs.