Download this Paper Open PDF in Browser

Fast and Accurate Long Stepping Simulation of the Heston Stochastic Volatility Model

30 Pages Posted: 29 May 2010 Last revised: 16 Sep 2010

Jiun Hong Chan

University of Melbourne - Centre for Actuarial Studies

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies

Date Written: May 28, 2010

Abstract

In this paper, we present three new discretization schemes for the Heston stochastic volatility model - two schemes for simulating the variance process and one scheme for simulating the integrated variance process conditional on the initial and the end-point of the variance process. Instead of using a short time-stepping approach to simulate the variance process and its integral, these new schemes evolve the Heston process accurately over long steps without the need to sample the intervening values. Hence, prices of financial derivatives can be evaluated rapidly using our new approaches.

Keywords: Heston stochastic volatility, variance process, integrated variace process, long stepping simulation schemes, sampling gamma random variables

JEL Classification: G13

Suggested Citation

Chan, Jiun Hong and Joshi, Mark S., Fast and Accurate Long Stepping Simulation of the Heston Stochastic Volatility Model (May 28, 2010). Available at SSRN: https://ssrn.com/abstract=1617187 or http://dx.doi.org/10.2139/ssrn.1617187

Jiun Hong Chan

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Paper statistics

Downloads
1,360
Rank
10,752
Abstract Views
4,716