Options pricing with Markov regime switching Heston volatility Hull–White interest rates and stochastic intensity

Abstract This paper proposes an options pricing model that incorporates stochastic volatility, stochastic interest rates, and stochastic jump intensity. Market shocks are modeled using a jump process, with each jump governed by an asymmetric double-exponential distribution. The model also integrates a Markov regime-switching framework for volatility and the risk-free rate, allowing the market to alternate between a finite number of distinct economic states. A closed-form solution for European option pricing is derived. To demonstrate the significance of the proposed model, a comparison with various other models is performed, and the sensitivity of the various model parameters is illustrated.