Option price computation under binary control regime switching triple-factor stochastic volatility model

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This study presents an efficient pricing framework for European call options under a binary control regime that switches to a triple-factor stochastic volatility model, tailored for recessionary and stable market phases. The model captures regime transitions via binary controls and incorporates triple volatility sources. We derive the characteristic function and implement a semi-analytical pricing formula using trapezoidal and Gauss-Laguerre quadrature in MATLAB. The economic recovery process is influenced by the control parameter α, while the impacts θ₃ are considered secondary to other factors driving recovery. The results show that the option prices under recessionary conditions were lower compared to the recession-free regime, thereby validating the model’s sensitivity to macroeconomic uncertainty. It further confirms that the binary control regime switching triple-factor stochastic volatility model offers greater accuracy and adaptability across economic states, making it a promising tool for option pricing in dynamic financial environments.