The Heston Stochastic-Local Volatility Model
Author | : Anthonie van der Stoep |
Publisher | : |
Total Pages | : 25 |
Release | : 2018 |
ISBN-10 | : OCLC:1304494669 |
ISBN-13 | : |
Rating | : 4/5 (69 Downloads) |
Download or read book The Heston Stochastic-Local Volatility Model written by Anthonie van der Stoep and published by . This book was released on 2018 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this article we propose an efficient Monte Carlo scheme for simulating the stochastic volatility model of Heston (1993) enhanced by a non-parametric local volatility component. This hybrid model combines the main advantages of the Heston model and the local volatility model introduced by Dupire (1994) and Derman & Kani (1998). In particular, the additional local volatility component acts as a "compensator" that bridges the mismatch between the non-perfectly calibrated Heston model and the market quotes for European-type options. By means of numerical experiments we show that our scheme enables a consistent and fast pricing of products that are sensitive to the forward volatility skew. Detailed error analysis is also provided.