Simulation schemes for the Heston model with Poisson conditioning

DOI10.1016/J.EJOR.2023.10.048MaRDI QIDQ6128927zbMATH OpenFDO

Authors Jaehyuk Choi, Yue Kuen Kwok

Publication date 16 April 2024

Published in European Journal of Operational Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2301.02800

zbMATH Keywords

(B) financeexact simulationgamma expansionHeston modelPoisson conditioning

Mathematics Subject Classification ID

Operations research and management science (90Bxx)

Abstract: Exact simulation schemes under the Heston stochastic volatility model (e.g., Broadie-Kaya and Glasserman-Kim) suffer from computationally expensive Bessel function evaluations. We propose a new exact simulation scheme without the Bessel function, based on the observation that the conditional integrated variance can be simplified when conditioned by the Poisson variate used for simulating the terminal variance. Our approach also enhances low-bias and time discretization schemes, which are suitable for derivatives with frequent monitoring. Extensive numerical tests reveal the good performance of the new simulation schemes in terms of accuracy, efficiency, and reliability when compared with existing methods.

Cited in

(3)

• Exact simulation of stochastic volatility models based on conditional Fourier-cosine method
• Fifty years at the interface between financial modeling and operations research
• Exact simulation scheme for the Ornstein-Uhlenbeck driven stochastic volatility model with the Karhunen-Loève expansions

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