How Does Economic Policy Uncertainty Reshape Option Pricing?
Abstract
ABSTRACT Economic policy uncertainty (EPU) is a critical yet often neglected factor in derivatives pricing, leading to systematic biases in existing valuation frameworks. This study proposes an advanced pricing model that explicitly incorporates a stochastic EPU factor with a regime‐switching long‐term mean into the stochastic volatility framework. The principal theoretical contribution of this research is a closed‐form analytical pricing formula for European options, which successfully overcomes the challenges of multiple stochastic factors and achieves substantial computational advantages over traditional numerical methods such as the Monte‐Carlo simulation. A preliminary empirical study using SSE 50 ETF option data demonstrates the model's superior pricing performance compared to other benchmarks.
Fields of Study & Subjects
Capital Investment and Risk Analysis
Stochastic processes and financial applications
Risk and Portfolio Optimization
Publication details
- Journal / source
- Journal of Futures Markets
- Publisher
- Wiley
- Volume
- 46
- Issue
- 7
- Pages
- 1298–1311
- Publication date
- 24 April 2026
- Language
- EN