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Single- and Multilevel Quadrature with Error Control for Fourier Pricing under the Rough Heston Model

Author

Listed:
  • Chiheb Ben Hammouda
  • Abderrahmene Ben Romdhane
  • Michael Samet
  • Raul F. Tempone

Abstract

Unlike the classical Heston model, Fourier pricing under the rough Heston model requires solving a fractional Riccati equation at every quadrature point. Since the required resolution varies with model parameters and quadrature point, a single uniform time discretization can be inefficient. We develop single- and multilevel Gauss-Laguerre quadrature methods that balance the time discretization and Fourier quadrature errors. Both methods scale the laguerre weight to the estimated Fourier integrand decay. The single-level method allocates a prescribed tolerance between the two errors. The multilevel method splits the integrand into a level-zero term and level differences, selecting quadrature points separately at each level. Suppose that the Fourier integrand discretization error is $O(\Delta t^p)$, that evaluating the characteristic function once costs $O(\Delta t^{-\beta})$, and that the algebraic Gauss-Laguerre quadrature error is $O(N^{-s_{SL}/2})$, where $s_{{SL}}$ is the smoothness index. Under this estimate and assumptions on the regularity and decay of level differences, we prove that the proposed single-level method requires $O(\epsilon^{-(\beta/p+2/s_{{SL}})})$ computational work to achieve accuracy $\epsilon$, whereas the proposed multilevel method requires $O(\epsilon^{-\beta/p})$ computational work. We also study root-exponential Gauss-Laguerre error models for practical multilevel quadrature allocation. Numerical experiments support the observed fractional Riccati and Fourier integrand convergence rates and root-exponential quadrature behavior, and show substantial reductions in quadrature cost from the proposed scaling. The multilevel method provides clear computational savings over the single-level method. We further benchmark the multilevel fractional Riccati method against the BL2 Markovian approximation and report lower total CPU time in the tested configurations.

Suggested Citation

  • Chiheb Ben Hammouda & Abderrahmene Ben Romdhane & Michael Samet & Raul F. Tempone, 2026. "Single- and Multilevel Quadrature with Error Control for Fourier Pricing under the Rough Heston Model," Papers 2609.00438, arXiv.org.
  • Handle: RePEc:arx:papers:2609.00438
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    References listed on IDEAS

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    1. Fabio Baschetti & Giacomo Bormetti & Silvia Romagnoli & Pietro Rossi, 2022. "The SINC way: a fast and accurate approach to Fourier pricing," Quantitative Finance, Taylor & Francis Journals, vol. 22(3), pages 427-446, March.
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    7. Ernst Eberlein & Kathrin Glau & Antonis Papapantoleon, 2010. "Analysis of Fourier Transform Valuation Formulas and Applications," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(3), pages 211-240.
    8. 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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    11. Michael Samet & Christian Bayer & Chiheb Ben Hammouda & Antonis Papapantoleon & Ra'ul Tempone, 2022. "Optimal Damping with Hierarchical Adaptive Quadrature for Efficient Fourier Pricing of Multi-Asset Options in L\'evy Models," Papers 2203.08196, arXiv.org, revised Oct 2023.
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