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A hybrid tree/finite-difference approach for Heston-Hull-White type models

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  • M. Briani
  • L. Caramellino
  • A. Zanette

Abstract

We study a hybrid tree-finite difference method which permits to obtain efficient and accurate European and American option prices in the Heston Hull-White and Heston Hull-White2d models. Moreover, as a by-product, we provide a new simulation scheme to be used for Monte Carlo evaluations. Numerical results show the reliability and the efficiency of the proposed methods

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  • M. Briani & L. Caramellino & A. Zanette, 2015. "A hybrid tree/finite-difference approach for Heston-Hull-White type models," Papers 1503.03705, arXiv.org, revised Dec 2017.
    • Handle: RePEc:arx:papers:1503.03705
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    References listed on IDEAS

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    1. Lech A. Grzelak & Cornelis W. Oosterlee, 2012. "On Cross-Currency Models with Stochastic Volatility and Correlated Interest Rates," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(1), pages 1-35, February.
    2. Nelson, Daniel B & Ramaswamy, Krishna, 1990. "Simple Binomial Processes as Diffusion Approximations in Financial Models," The Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 393-430.
    3. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    4. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    5. Grzelak, Lech & Oosterlee, Kees, 2009. "On The Heston Model with Stochastic Interest Rates," MPRA Paper 20620, University Library of Munich, Germany, revised 18 Jan 2010.
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    1. Goudenège, Ludovic & Molent, Andrea & Zanette, Antonino, 2016. "Pricing and hedging GLWB in the Heston and in the Black–Scholes with stochastic interest rate models," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 38-57.
    2. Ludovic Gouden`ege & Andrea Molent & Antonino Zanette, 2023. "Backward Hedging for American Options with Transaction Costs," Papers 2305.06805, arXiv.org, revised Jun 2023.
    3. Ludovic Gouden`ege & Andrea Molent & Antonino Zanette, 2018. "Computing Credit Valuation Adjustment solving coupled PIDEs in the Bates model," Papers 1809.05328, arXiv.org.
    4. Ludovic Goudenege & Andrea Molent & Antonino Zanette, 2015. "Pricing and Hedging GLWB in the Heston and in the Black-Scholes with Stochastic Interest Rate Models," Papers 1509.02686, arXiv.org.
    5. Andrea Molent, 2019. "Taxation of a GMWB Variable Annuity in a Stochastic Interest Rate Model," Papers 1901.11296, arXiv.org, revised May 2020.
    6. Ludovic Gouden`ege & Andrea Molent & Antonino Zanette, 2019. "Gaussian Process Regression for Pricing Variable Annuities with Stochastic Volatility and Interest Rate," Papers 1903.00369, arXiv.org, revised Jul 2019.

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