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Pricing barrier options in the Heston model using the Heath–Platen estimator

Author

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  • Coskun Sema

    (Department of Mathematics, University of Kaiserslautern, 67663 Kaiserlautern, Germany)

  • Korn Ralf

    (Department of Mathematics/Financial Mathematics Group, University of Kaiserslautern/Fraunhofer ITWM, 67663 Kaiserlautern, Germany)

Abstract

Both barrier options and the Heston stochastic volatility model are omnipresent in real-life applications of financial mathematics. In this paper, we apply the Heath–Platen (HP) estimator (as first introduced by Heath and Platen in [12]) to price barrier options in the Heston model setting as an alternative to conventional Monte Carlo methods and PDE based methods. We demonstrate the superior performance of the HP estimator via numerical examples and explain this performance by a detailed look at the underlying theoretical concept of the HP estimator.

Suggested Citation

  • Coskun Sema & Korn Ralf, 2018. "Pricing barrier options in the Heston model using the Heath–Platen estimator," Monte Carlo Methods and Applications, De Gruyter, vol. 24(1), pages 29-41, March.
    • Handle: RePEc:bpj:mcmeap:v:24:y:2018:i:1:p:29-41:n:4
    DOI: 10.1515/mcma-2018-0004
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    References listed on IDEAS

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