Efficient Simulation of the Double Heston Model
The IUP Journal of Computational Mathematics, Vol. IV, No. 3, September 2011, pp. 23-73
Posted: 6 Jul 2012
There are 2 versions of this paper
Efficient Simulation of the Double Heston Model
Date Written: 2011
Abstract
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. This paper focuses on numerical implementation of this model. First, following the works of Lord and Kahl (2008), the analytical call option price formula given by Christoffersen et al. (2009) is corrected. Then, the discretization schemes of Andersen, Zhu and Alfonsi are numerically compared to the Euler scheme.
Keywords: Double Heston model, Stochastic volatility, Equity options, Characteristic function, Discretization scheme
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