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

See all articles by Lech A. Grzelak

Lech A. Grzelak

Delft University of Technology

Cornelis W. Oosterlee

Utrecht University - Faculty of Science

Sacha van Weeren

Independent

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

Grzelak, Lech Aleksander and Oosterlee, Cornelis W. and Van weeren, Sacha, Extension of Stochastic Volatility Equity Models with Hull-White Interest Rate Process (February 17, 2009). Quantitative Finance, 12, p.89–105, 2012, Available at SSRN: https://ssrn.com/abstract=1344959 or http://dx.doi.org/10.2139/ssrn.1344959

Lech Aleksander Grzelak (Contact Author)

Delft University of Technology ( email )

Netherlands
00310655731315 (Phone)

Cornelis W. Oosterlee

Utrecht University - Faculty of Science

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Sacha Van weeren

Independent ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
965
Abstract Views
4,821
Rank
52,519
PlumX Metrics