Efficient Simulation of the Double Heston Model
Daiwa Capital Markets Europe
Ecole Polytechnique, Paris
January 11, 2010
Stochastic volatility models have replaced Black-Scholes model since they are able to generate a volatility smile. However, standard models fail to capture the smile slope and level movements. The Double-Heston model provides a more flexible approach to model the stochastic variance. In this paper, we focus on numerical implementation of this model. First, following the works of Lord and Kahl, we correct the analytical call option price formula given by Christoffersen et al. Then, we compare numerically the discretization schemes of Andersen, Zhu and Alfonsi to the Euler scheme.
Number of Pages in PDF File: 52
Keywords: double Heston model, stochastic volatility, equity options, characteristic function, discretization scheme
JEL Classification: G13working papers series
Date posted: July 18, 2009 ; Last revised: January 30, 2010
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