Malliavin differentiability of the Heston volatility and applications to option pricing

Elisa Alos and Christian-Oliver Ewald

MPRA Paper from University Library of Munich, Germany

Abstract: We prove that the Heston volatility is Malliavin differentiable under the classical Novikov condition and give an explicit expression for the derivative. This result guarantees the applicability of Malliavin calculus in the framework of the Heston stochastic volatility model. Furthermore we derive conditions on the parameters which assure the existence of the second Malliavin derivative of the Heston volatility. This allows us to apply recent results of the first author [3] in order to derive approximate option pricing formulas in the context of the Heston model. Numerical results are given.

Keywords: Malliavin calculus; stochastic volatility models; Heston model; Cox- Ingersoll-Ross process; Hull and White formula; Option pricing (search for similar items in EconPapers)
JEL-codes: C02 G11 G13 (search for similar items in EconPapers)
Date: 2007-05-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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