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An Efficient Semi-Analytical Simulation for the Heston Model

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  • Xianming Sun
  • Siqing Gan

Abstract

With splitting technique, a new semi-analytical scheme with predictable strong convergence order 1.0 is proposed for the transformed Heston model, where the variance process is displaced by the corresponding volatility process. The volatility process is decomposed into a linear SDE and an ODE, both of which have the analytical solution, but the SDE is simulated by the Euler method while the ODE is approximated analytically with a slight modification. Numerical tests show its high efficiency and accuracy in the simulation for the mean-reverting square root process. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Xianming Sun & Siqing Gan, 2014. "An Efficient Semi-Analytical Simulation for the Heston Model," Computational Economics, Springer;Society for Computational Economics, vol. 43(4), pages 433-445, April.
    • Handle: RePEc:kap:compec:v:43:y:2014:i:4:p:433-445
    DOI: 10.1007/s10614-013-9368-9
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    References listed on IDEAS

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    1. Alexander Van Haastrecht & Antoon Pelsser, 2010. "Efficient, Almost Exact Simulation Of The Heston Stochastic Volatility Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(01), pages 1-43.
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    7. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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    Cited by:

    1. Fazlollah Soleymani, 2019. "Efficient Semi-Discretization Techniques for Pricing European and American Basket Options," Computational Economics, Springer;Society for Computational Economics, vol. 53(4), pages 1487-1508, April.

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