Conditional sampling for barrier option pricing under the Heston model
AbstractWe propose a quasi-Monte Carlo algorithm for pricing knock-out and knock-in barrier options under the Heston (1993) stochastic volatility model. This is done by modifying the LT method from Imai and Tan (2006) for the Heston model such that the first uniform variable does not influence the stochastic volatility path and then conditionally modifying its marginals to fulfill the barrier condition(s). We show this method is unbiased and never does worse than the unconditional algorithm. Additionally the conditioning is combined with a root finding method to also force positive payouts. The effectiveness of this method is shown by extensive numerical results.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1207.6566.
Date of creation: Jul 2012
Date of revision: Dec 2012
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
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- 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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