Higher-Order Weak Schemes for the Heston Stochastic Volatility Model by Extrapolation
25 Pages Posted: 6 Mar 2020 Last revised: 1 Mar 2021
Date Written: February 28, 2021
We consider a time-discrete scheme for the Heston stochastic volatility model, which employs the stochastic trapezoidal rule to discretize the logarithmic asset process, provided that the variance process is simulated exactly. We prove that, with respect to any polynomial function of the log-asset process, the weak error can be expanded to arbitrarily high powers of step size, which allows us to construct higher-order weak approximations by extrapolation. The result applies for the full parameter regime.
Keywords: Heston model, weak order, extrapolation, trapezoidal rule, exact simulation
JEL Classification: C63, G13
Suggested Citation: Suggested Citation