We propose an efficient hybrid tree/finite difference method in order to approximate the Heston model (and possibly other stochastic volatility models). We prove the convergence by embedding the procedure in a bivariate Markov chain and we study the approximation of European and American option prices. We finally provide numerical experiments that give accurate option prices in the Heston model, showing the reliability and the efficiency of the algorithm.

Briani, M., CARAMELLINO, L., & Zanette, A. (2017). A hybrid approach for the implementation of the Heston model. IMA JOURNAL OF MANAGEMENT MATHEMATICS, 28(4), 467-500 [10.1093/imaman/dpv032].

A hybrid approach for the implementation of the Heston model

CARAMELLINO, LUCIA;
2017

Abstract

We propose an efficient hybrid tree/finite difference method in order to approximate the Heston model (and possibly other stochastic volatility models). We prove the convergence by embedding the procedure in a bivariate Markov chain and we study the approximation of European and American option prices. We finally provide numerical experiments that give accurate option prices in the Heston model, showing the reliability and the efficiency of the algorithm.
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore MAT/06 - Probabilita' e Statistica Matematica
English
European and American options.; Finite differences; Heston model; Tree methods;
http://imaman.oxfordjournals.org/
Briani, M., CARAMELLINO, L., & Zanette, A. (2017). A hybrid approach for the implementation of the Heston model. IMA JOURNAL OF MANAGEMENT MATHEMATICS, 28(4), 467-500 [10.1093/imaman/dpv032].
Briani, M; Caramellino, L; Zanette, A
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2108/189237
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