Synthetic American Option Pricing via Jump-HMM-Driven Heston Implied Volatility
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| Format: | Preprint |
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2026
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| _version_ | 1866910218456137728 |
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| author | Sun, Julia Jin, Zheyu Zhang, Jiawei Varner, Jeffrey D. |
| author_facet | Sun, Julia Jin, Zheyu Zhang, Jiawei Varner, Jeffrey D. |
| contents | Generating realistic synthetic option prices requires implied volatility as an input, yet implied volatility is itself derived from observed option prices, creating a circular dependency that limits synthetic data for machine-learning and risk-analysis applications. We break this circularity with a pipeline in which implied volatility emerges as an output of a structural model of equity returns. A Jump Hidden Markov Model produces multi-asset price paths with realistic stylized facts and cross-asset tail dependence; a modified Heston variance process, whose mean-reversion target depends on regime state, days to expiration, moneyness, and a market-mood indicator, converts those paths into implied-volatility paths; and a recombining binomial lattice prices American options from the resulting surface. Initializing variance at its mean-reversion target for each strike-expiration pair lets smile, skew, and term structure emerge without external calibration. We calibrate the shape function through a hierarchy spanning a parametric baseline, a globally shared neural surrogate, and a sector-specific neural surrogate fit to a multi-ticker, multi-sector option ladder. A temporal holdout on a multi-day capture isolated scheduled corporate events as the dominant source of test-time generalization error, and calendar-derived earnings-distance and same-sector peer-coupling features recovered the anticipatory portion of that signal. We then apply the framework as a synthetic-data generator on real near-the-money put and call contracts, forward-simulating price paths, and recovering path-conditional implied volatility, finite-difference American Greeks, and terminal short-premium profit and loss from one coherent simulation, and confirm cross-ticker robustness by re-running on a second underlying from a different sector and volatility regime. The framework is released as an open-source Julia package. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2605_13998 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Synthetic American Option Pricing via Jump-HMM-Driven Heston Implied Volatility Sun, Julia Jin, Zheyu Zhang, Jiawei Varner, Jeffrey D. Computational Finance Machine Learning Generating realistic synthetic option prices requires implied volatility as an input, yet implied volatility is itself derived from observed option prices, creating a circular dependency that limits synthetic data for machine-learning and risk-analysis applications. We break this circularity with a pipeline in which implied volatility emerges as an output of a structural model of equity returns. A Jump Hidden Markov Model produces multi-asset price paths with realistic stylized facts and cross-asset tail dependence; a modified Heston variance process, whose mean-reversion target depends on regime state, days to expiration, moneyness, and a market-mood indicator, converts those paths into implied-volatility paths; and a recombining binomial lattice prices American options from the resulting surface. Initializing variance at its mean-reversion target for each strike-expiration pair lets smile, skew, and term structure emerge without external calibration. We calibrate the shape function through a hierarchy spanning a parametric baseline, a globally shared neural surrogate, and a sector-specific neural surrogate fit to a multi-ticker, multi-sector option ladder. A temporal holdout on a multi-day capture isolated scheduled corporate events as the dominant source of test-time generalization error, and calendar-derived earnings-distance and same-sector peer-coupling features recovered the anticipatory portion of that signal. We then apply the framework as a synthetic-data generator on real near-the-money put and call contracts, forward-simulating price paths, and recovering path-conditional implied volatility, finite-difference American Greeks, and terminal short-premium profit and loss from one coherent simulation, and confirm cross-ticker robustness by re-running on a second underlying from a different sector and volatility regime. The framework is released as an open-source Julia package. |
| title | Synthetic American Option Pricing via Jump-HMM-Driven Heston Implied Volatility |
| topic | Computational Finance Machine Learning |
| url | https://arxiv.org/abs/2605.13998 |