Extension of Stochastic Volatility Equity Models with Hull-White Interest Rate Process
Quantitative Finance, 12, p.89–105, 2012
26 Pages Posted: 17 Feb 2009 Last revised: 6 Aug 2014
Date Written: February 17, 2009
Abstract
We present an extension of stochastic volatility equity models by a stochastic Hull-White interest rate component while assuming non-zero correlations between the underlying processes. We place these systems of stochastic differential equations in the class of affine jump diffusion - linear quadratic jump-diffusion processes (Duffie, Pan and Singleton, Cheng and Scaillet) so that the pricing of European products can be efficiently done within the Fourier cosine expansion pricing framework. We compare the new stochastic volatility Schobel-Zhu-Hull-White hybrid model with a Heston-Hull-White model, and also apply the models to price some hybrid structured derivatives that combine the equity and interest rate asset classes.
Keywords: Schobel-Zhu-Hull-White, Heston-Hull-White, stochastic volatility, hybrid
JEL Classification: G12, G13
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Alexander Van Haastrecht, Roger Lord, ...
-
Stochastic Interest Rates for Local Volatility Hybrids Models
By Eric Benhamou, Arnaud Rivoira, ...
-
Accelerating Exotic Option Pricing and Model Calibration Using GPUs
By André Bernemann, Ralph Schreyer, ...
-
Impact of Stochastic Interest Rates and Stochastic Volatility on Variable Annuities
By Eric Benhamou and Pierre Gauthier
-
Impact of Stochastic Interest Rates and Stochastic Volatility on Variable Annuities
By Eric Benhamou and Pierre Gauthier
-
The Affine Heston Model with Correlated Gaussian Interest Rates for Pricing Hybrid Derivatives
By Lech A. Grzelak, Cornelis W. Oosterlee, ...
-
Incorporating an Interest Rate Smile in an Equity Local Volatility Model
By Lech A. Grzelak, Natalia Borovykh, ...
-
An Implementation of the Hybrid-Heston-Hull-White Model
By Joerg Kienitz and Holger Kammeyer