ON PRICING CONTINGENT CLAIMS UNDER THE DOUBLE HESTON MODEL

M. Costabile (), I. Massabò () and E. Russo ()
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M. Costabile: Department of Business Administration, University of Calabria, Ponte Bucci Cubo 3 C, 87036, Rende (CS), Italy
I. Massabò: Department of Business Administration, University of Calabria, Ponte Bucci Cubo 3 C, 87036, Rende (CS), Italy
E. Russo: Department of Business Administration, University of Calabria, Ponte Bucci Cubo 3 C, 87036, Rende (CS), Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 05, 1-27

Abstract: This article presents a lattice based approach for pricing contingent claims when the underlying asset evolves according to the double Heston (dH) stochastic volatility model introduced by Christoffersen et al. (2009). We discretize the continuous evolution of both squared volatilities by a "binomial pyramid", and consider the asset value as an auxiliary state variable for which a subset of possible realizations is attached to each node of the pyramid. The elements of the subset cover the range of asset prices at each time slice, and claim price is computed solving backward through the "binomial pyramid". Numerical experiments confirm the accuracy and efficiency of the proposed model.

Keywords: Double Heston model; stochastic volatility; discrete-time models (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024912500331

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