PRICING VOLATILITY SWAPS UNDER DOUBLE HESTON STOCHASTIC VOLATILITY MODEL WITH REGIME SWITCHING

Abstract

In this paper, we consider a continuous-time Heston stochastic volatility model with regime-switching, the asset and volatility dynamics are closely related to the value of Markovian modulated process. Compared with the previous literatures, our propose is to extend the one-stochastic volatility model to the double-stochastic volatility model. We are interested in finding solutions to pricing the discretely-sampled volatility swaps under Heston’s framework. We also get a closed-form solution by deriving the characteristic function of the lognormal asset price via a system of partial differential equations.