Pricing barrier options in the Heston model using the Heath–Platen estimator

Coskun Sema () and Korn Ralf ()
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Coskun Sema: Department of Mathematics, University of Kaiserslautern, 67663 Kaiserlautern, Germany
Korn Ralf: Department of Mathematics/Financial Mathematics Group, University of Kaiserslautern/Fraunhofer ITWM, 67663 Kaiserlautern, Germany

Monte Carlo Methods and Applications, 2018, vol. 24, issue 1, 29-41

Abstract: Both barrier options and the Heston stochastic volatility model are omnipresent in real-life applications of financial mathematics. In this paper, we apply the Heath–Platen (HP) estimator (as first introduced by Heath and Platen in [12]) to price barrier options in the Heston model setting as an alternative to conventional Monte Carlo methods and PDE based methods. We demonstrate the superior performance of the HP estimator via numerical examples and explain this performance by a detailed look at the underlying theoretical concept of the HP estimator.

Keywords: Barrier option pricing; Heston stochastic volatility model; Heath–Platen estimator (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/mcma-2018-0004

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