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A hybrid approach for the implementation of the Heston model

Maya Briani, Lucia Caramellino and Antonino Zanette

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Abstract: We propose a hybrid tree-finite difference method in order to approximate the Heston model. We prove the convergence by embedding the procedure in a bivariate Markov chain and we study the convergence of European and American option prices. We finally provide numerical experiments that give accurate option prices in the Heston model, showing the reliability and the efficiency of the algorithm.

Date: 2013-07, Revised 2017-09
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Published in IMA Journal of Management Mathematics 28 4 (2017) 467-500

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