Simulation schemes for the Heston model with Poisson conditioning

Jaehyuk Choi and Yue Kuen Kwok

European Journal of Operational Research, 2024, vol. 314, issue 1, 363-376

Abstract: Exact simulation schemes under the Heston stochastic volatility model (e.g., Broadie–Kaya and Glasserman–Kim) suffer from computationally expensive modified Bessel function evaluations. We propose a new exact simulation scheme without the modified 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 the low-bias and time discretization schemes, which are suitable for pricing 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.

Keywords: (B) finance; Heston model; Exact simulation; Poisson conditioning; Gamma expansion (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221723008238
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:314:y:2024:i:1:p:363-376

DOI: 10.1016/j.ejor.2023.10.048

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().