Exact Simulation of the Wishart Multidimensional Stochastic Volatility Model

Chulmin Kang (), Wanmo Kang () and Jong Mun Lee ()
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Chulmin Kang: KTB Investment and Securities, Seoul 07325, Republic of Korea
Wanmo Kang: Department of Mathematical Sciences, Korea Advanced Institute of Science and Technology, Daejeon 34141, Republic of Korea
Jong Mun Lee: MERITZ Fire and Marine Insurance, Seoul 06232, Republic of Korea

Operations Research, 2017, vol. 65, issue 5, 1190-1206

Abstract: In this article, we propose an exact simulation method of the Wishart multidimensional stochastic volatility (WMSV) model—a single asset model with a multidimensional Wishart variance process. Our method is based on analysis of the conditional characteristic function of the log-price given a terminal volatility level. In particular, we found an explicit expression for the conditional characteristic function for the Heston model. Numerical experiments demonstrate that our new method is much faster and reliable than the Euler discretization method.

Keywords: Wishart processes; stochastic volatility; Monte-Carlo method; exact simulation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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