Higher-Order Weak Schemes for the Heston Stochastic Volatility Model by Extrapolation

25 Pages Posted: 6 Mar 2020 Last revised: 1 Mar 2021

See all articles by Chao Zheng

Chao Zheng

Zhejiang University of Finance and Economics

Date Written: February 28, 2021

Abstract

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

Zheng, Chao, Higher-Order Weak Schemes for the Heston Stochastic Volatility Model by Extrapolation (February 28, 2021). Available at SSRN: https://ssrn.com/abstract=3546496 or http://dx.doi.org/10.2139/ssrn.3546496

Chao Zheng (Contact Author)

Zhejiang University of Finance and Economics ( email )

School of Data Sciences
Hangzhou, Zhejiang Province 310018
China

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