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On Pricing Contingent Claims Under The Double Heston Model

Author

Listed:
  • 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)

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.

Suggested Citation

  • M. Costabile & I. Massabò & E. Russo, 2012. "On Pricing Contingent Claims Under The Double Heston Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1-27.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:05:n:s0219024912500331
    DOI: 10.1142/S0219024912500331
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    References listed on IDEAS

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    1. Christian Gourieroux & Razvan Sufana, 2003. "Whishart Quadratic Term Structure Models," Working Papers 2003-50, Center for Research in Economics and Statistics.
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    Cited by:

    1. Duy Nguyen, 2018. "A hybrid Markov chain-tree valuation framework for stochastic volatility jump diffusion models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-30, December.
    2. Tianyao Chen & Xue Cheng & Jingping Yang, 2019. "Common Decomposition of Correlated Brownian Motions and its Financial Applications," Papers 1907.03295, arXiv.org, revised Nov 2020.

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