THE HESTON STOCHASTIC-LOCAL VOLATILITY MODEL: EFFICIENT MONTE CARLO SIMULATION
2014 ◽
Vol 17
(07)
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pp. 1450045
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Keyword(s):
In this paper we propose an efficient Monte Carlo scheme for simulating the stochastic volatility model of Heston (1993) enhanced by a nonparametric local volatility component. This hybrid model combines the main advantages of the Heston model and the local volatility model introduced by Dupire (1994) and Derman & Kani (1998). In particular, the additional local volatility component acts as a "compensator" that bridges the mismatch between the nonperfectly calibrated Heston model and the market quotes for European-type options. By means of numerical experiments we show that our scheme enables a consistent and fast pricing of products that are sensitive to the forward volatility skew. Detailed error analysis is also provided.
2019 ◽
Vol 22
(04)
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pp. 1950009
2012 ◽
Vol 15
(05)
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pp. 1250033
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2005 ◽
Vol 2005
(3)
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pp. 307-322
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2009 ◽
Vol 12
(06)
◽
pp. 877-899
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