Efficient Simulation of the Double Heston Model

52 Pages Posted: 18 Jul 2009 Last revised: 30 Jan 2010

See all articles by Pierre Gauthier

Pierre Gauthier

Daiwa Capital Markets Europe

Dylan Possamai

Ecole Polytechnique, Paris

Multiple version iconThere are 2 versions of this paper

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

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

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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