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An analytical approximation method for pricing barrier options under the double Heston model

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  • Sumei Zhang
  • Guangdong Zhang

Abstract

The purpose of the paper is to provide an efficient pricing method for single barrier options under the double Heston model. By rewriting the model as a singular and regular perturbed BS model, the double Heston model can separately mimic a fast time-scale and a slow time-scale. With the singular and regular perturbation techniques, we analytically derive the first-order asymptotic expansion of the solution to a barrier option pricing partial differential equation. The convergence and efficiency of the approximate method is verified by Monte Carlo simulation. Numerical results show that the presented asymptotic pricing method is fast and accurate.

Suggested Citation

  • Sumei Zhang & Guangdong Zhang, 2019. "An analytical approximation method for pricing barrier options under the double Heston model," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 48(22), pages 5657-5671, November.
    • Handle: RePEc:taf:lstaxx:v:48:y:2019:i:22:p:5657-5671
    DOI: 10.1080/03610926.2018.1549257
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