The affine Heston model with correlated Gaussian interest rates for pricing hybrid derivatives

Lech Grzelak, Cornelis Oosterlee and Sacha Van Weeren

Quantitative Finance, 2011, vol. 11, issue 11, 1647-1663

Abstract: In this article we define a multi-factor equity–interest rate hybrid model with non-zero correlation between the stock and interest rate. The equity part is modeled by the Heston model and we use a Gaussian multi-factor short-rate process. By construction, the model fits in the framework of affine diffusion processes, allowing fast calibration to plain vanilla options. We also provide an efficient Monte Carlo simulation scheme.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:11:y:2011:i:11:p:1647-1663

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DOI: 10.1080/14697688.2011.615216

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