A hybrid approach for the implementation of the Heston model

Maya Briani, Lucia Caramellino and Antonino Zanette
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Maya Briani: IAC - Istituto per le Applicazioni del Calcolo "Mauro Picone" - CNR - National Research Council of Italy | Consiglio Nazionale delle Ricerche
Lucia Caramellino: Dipartimento di Matematica [Rome] - Università degli Studi di Roma Tor Vergata [Roma, Italia] = University of Rome Tor Vergata [Rome, Italy] = Université de Rome Tor Vergata [Rome, Italie]
Antonino Zanette: MATHRISK - Mathematical Risk Handling - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École nationale des ponts et chaussées - Centre Inria de Paris - Inria - Institut National de Recherche en Informatique et en Automatique

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Abstract: We propose a hybrid tree-finite difference method in order to approximate the Heston model. We prove the convergence by embedding the procedure in a bivariate Markov chain and we study the convergence of European and American option prices. We finally provide numerical experiments that give accurate option prices in the Heston model, showing the reliability and the efficiency of the algorithm.

Date: 2017-10-01
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Citations: View citations in EconPapers (6)

Published in IMA Journal of Management Mathematics, 2017, 28 (4), pp.467-500. ⟨10.1093/imaman/dpv032⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00916440

DOI: 10.1093/imaman/dpv032

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