In this paper, a closed-form analytical solution of option price under the Bi-Heston model is derived. Through empirical analysis, the advantages and disadvantages of the parametric pricing model are compared and analysed with those of the non-parametric model. The analysis shows that: (1) the parametric pricing model significantly outperforms the machine learning model in terms of in-sample pricing effects, while the Bi-Heston model slightly outperforms the Heston model. (2) In terms of out-of-sample pricing, the machine learning model is inferior to the parametric model for call options, while the Bi-Heston model is significantly better than the other two models for put options, and the other two models are similar. (3) In the robustness analysis of the three pricing models, the machine learning model shows strong instability, while the Bi-Heston model shows a more stable side.
Keywords: Bi-Heston model; Heston model; Option; XGBoost.
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