Abstracts

Heston-Type Stochastic Volatility with a Markov Switching Regime

Katsumasa Nishide (Yokohama National University, Japan)

Thursday June 5, 11:00-11:30 | session P5 | Poster session | room lobby

We propose an extension of Heston (1993)'s stochastic volatility model to the case where the mean reverting level of the volatility is modulated by a Markov chain. An explicit formula is obtained for the option price which includes the solution of a matrix ODE. It is demonstrated that our model is able to induce a wide variety of volatility surfaces with both flat and steep smiles/smirks for the same parameter values.