Conditional sampling for barrier option pricing under the Heston model
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Abstract: We 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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Cites work
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Cited in
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- Smoothing the payoff for efficient computation of Basket option prices
- An analytical approximation method for pricing barrier options under the double Heston model
- Equivalence between Sobolev spaces of first-order dominating mixed smoothness and unanchored ANOVA spaces on \(\mathbb{R}^d\)
- Efficient Computation of Option Prices and Greeks by Quasi--Monte Carlo Method with Smoothing and Dimension Reduction
- Efficient Importance Sampling in Quasi-Monte Carlo Methods for Computational Finance
- Analysis of Preintegration Followed by Quasi–Monte Carlo Integration for Distribution Functions and Densities
- Fast barrier option pricing by the COS BEM method in Heston model (with Matlab code)
- Density estimation for elliptic PDE with random input by preintegration and quasi-Monte Carlo methods
- High dimensional integration of kinks and jumps -- smoothing by preintegration
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