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Efficient Simulation of the Double Heston Model

Pierre Gauthier

Daiwa Capital Markets Europe

Dylan Possamai

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: G13

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Date posted: July 18, 2009 ; Last revised: January 30, 2010

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

Contact Information

Pierre Gauthier
Daiwa Capital Markets Europe ( email )
5 King William Street
London, EC4N 7DA
United Kingdom
Dylan Possamai (Contact Author)
Ecole Polytechnique, Paris ( email )
Ecole Polytechnique
Palaiseau, 91128
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