Simulation schemes for the Heston model with Poisson conditioning
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Publication:6128927
DOI10.1016/J.EJOR.2023.10.048arXiv2301.02800MaRDI QIDQ6128927
Publication date: 16 April 2024
Published in: European Journal of Operational Research (Search for Journal in Brave)
Abstract: Exact simulation schemes under the Heston stochastic volatility model (e.g., Broadie-Kaya and Glasserman-Kim) suffer from computationally expensive Bessel function evaluations. We propose a new exact simulation scheme without the Bessel function, based on the observation that the conditional integrated variance can be simplified when conditioned by the Poisson variate used for simulating the terminal variance. Our approach also enhances low-bias and time discretization schemes, which are suitable for derivatives with frequent monitoring. Extensive numerical tests reveal the good performance of the new simulation schemes in terms of accuracy, efficiency, and reliability when compared with existing methods.
Full work available at URL: https://arxiv.org/abs/2301.02800
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