52 Pages Posted: 18 Jul 2009 Last revised: 30 Jan 2010
Date Written: 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.
Keywords: double Heston model, stochastic volatility, equity options, characteristic function, discretization scheme
JEL Classification: G13
Suggested Citation: Suggested Citation
Gauthier, Pierre and Possamai, Dylan, Efficient Simulation of the Double Heston Model (January 11, 2010). Available at SSRN: https://ssrn.com/abstract=1434853 or http://dx.doi.org/10.2139/ssrn.1434853
By Jianwei Zhu