American options in the Volterra Heston model

DOI10.1137/21M140674XzbMATH Open1491.91140arXiv2103.11734OpenAlexW3138189471MaRDI QIDQ5080128FDOQ5080128

Authors: Etienne Chevalier, Sergio Pulido, Elizabeth Zúñiga 

Publication date: 31 May 2022

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We price American options using kernel-based approximations of the Volterra Heston model. We choose these approximations because they allow simulation-based techniques for pricing. We prove the convergence of American option prices in the approximating sequence of models towards the prices in the Volterra Heston model. A crucial step in the proof is to exploit the affine structure of the model in order to establish explicit formulas and convergence results for the conditional Fourier-Laplace transform of the log price and an adjusted version of the forward variance. We illustrate with numerical examples our convergence result and the behavior of American option prices with respect to certain parameters of the model.

Full work available at URL: https://arxiv.org/abs/2103.11734

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• scientific article; zbMATH DE number 559089

zbMATH Keywords

American optionsFourier-Laplace transformrough volatilityRiccati-Volterra equationsVolterra Heston modelforward variance

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Laplace transform (44A10) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (7)

• The inverse volatility problem for American options
• SHOULD AN AMERICAN OPTION BE EXERCISED EARLIER OR LATER IF VOLATILITY IS NOT ASSUMED TO BE A CONSTANT?
• The rough Hawkes Heston stochastic volatility model
• Variational Formulation of American Option Prices in the Heston Model
• American options: the EPV pricing model
• American options exercise boundary when the volatility changes randomly
• ROUGH-HESTON LOCAL-VOLATILITY MODEL

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