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Pricing and Hedging in Stochastic Volatility Regime Switching Models

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DOI: 10.4236/jmf.2013.31006    4,098 Downloads   7,275 Views   Citations


We consider general regime switching stochastic volatility models where both the asset and the volatility dynamics depend on the values of a Markov jump process. Due to the stochastic volatility and the Markov regime switching, this financial market is thus incomplete and perfect pricing and hedging of options are not possible. Thus, we are interested in finding formulae to solve the problem of pricing and hedging options in this framework. For this, we use the local risk minimization approach to obtain pricing and hedging formulae based on solving a system of partial differential equations. Then we get also formulae to price volatility and variance swap options on these general regime switching stochastic volatility models.


Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

S. Goutte, "Pricing and Hedging in Stochastic Volatility Regime Switching Models," Journal of Mathematical Finance, Vol. 3 No. 1, 2013, pp. 70-80. doi: 10.4236/jmf.2013.31006.


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