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Time Dependent Heston Model

Eric Benhamou

Thomson Reuters

Emmanuel Gobet

Ecole Polytechnique, Paris - Centre de Mathematiques Appliquees

Mohammed Miri

Thomson Reuters

March 24, 2009

The use of the Heston model is still challenging because it has a closed formula only when the parameters are constant [Hes93] or piecewise constant [MN03]. Hence, using a small volatility of volatility expansion and Malliavin calculus techniques, we derive an accurate analytical formula for the price of vanilla options for any time dependent Heston model (the accuracy is less than a few bps for various strikes and maturities). In addition, we establish tight error estimates. The advantage of this approach over Fourier based methods is its rapidity (gain by a factor 100 or more), while maintaining a competitive accuracy. From the approximative formula, we also derive some corollaries related first to equivalent Heston models (extending some work of Piterbarg on stochastic volatility models [Pit05]) and second, to the calibration procedure in terms of ill-posed problems.

Number of Pages in PDF File: 37

Keywords: asymptotic expansion, Malliavin calculus, small volatility of volatility, time dependent Heston model

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Date posted: March 25, 2009  

Suggested Citation

Benhamou, Eric and Gobet, Emmanuel and Miri, Mohammed, Time Dependent Heston Model (March 24, 2009). Available at SSRN: http://ssrn.com/abstract=1367955 or http://dx.doi.org/10.2139/ssrn.1367955

Contact Information

Eric Benhamou
Thomson Reuters ( email )
6 Rue Rougemont
Paris, 75009
HOME PAGE: http://www.thomsonreuters.com
Emmanuel Gobet (Contact Author)
Ecole Polytechnique, Paris - Centre de Mathematiques Appliquees ( email )
Palaiseau Cedex, 91128
Mohammed Miri
Thomson Reuters ( email )
6 Bd Haussman
France, FL 75009
Feedback to SSRN

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References:  37
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