2011/11/25 by Ian Iscoe, Iscoe, Ian, Asif Lakhany +1
Economics, Econometrics and Finance · Social Sciences · #60-08 (Secondary) #65C05 (Primary) #65C20 (Primary) #Classical Analysis and ODEs (math.CA) #Computational Finance (q-fin.CP) #FOS: Economics and business #FOS: Mathematics #Financial Risk and Volatility Modeling #Insurance, Mortality, Demography, Risk Management #Numerical Analysis (math.NA) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1111.6067
openalex publication_date 2011/11/25 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Recent years have seen an increased level of interest in pricing equity options under a stochastic volatility model such as the Heston model. Often, simulating a Heston model is difficult, as a standard finite difference scheme may lead to significant bias in the simulation result. Reducing the bias to an acceptable level is not only challenging but computationally demanding. In this paper we address this issue by providing an alternative simulation strategy -- one that systematically decreases the bias in the simulation. Additionally, our methodology is adaptive and achieves the reduction in bias with "near" minimum computational effort. We illustrate this feature with a numerical example.