Weak approximation of Heston model by discrete random variables

A. Lenkšas and V. Mackevičius

Mathematics and Computers in Simulation (MATCOM), 2015, vol. 113, issue C, 1-15

Abstract: We construct a first-order weak split-step approximation for the solution of the Heston model that uses, at each step, generation of two discrete two-valued random variables. The Heston equation system is split into the deterministic part, solvable explicitly, and the stochastic part that is approximated by discrete random variables. The approximation is illustrated by several simulation examples, including applications to option pricing.

Keywords: Heston model; CIR; Weak approximations; Split-step approximations; Option pricing (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:113:y:2015:i:c:p:1-15

DOI: 10.1016/j.matcom.2015.02.003

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