An Efficient Tree for the Heston Stochastic-Volatility Model
Date Issued
2015
Date
2015
Author(s)
Chou, Ming-Hsin
Abstract
Heston’s model ranks among the most popular stochastic-volatility mod- els. However, trees for the Heston model are few. In this thesis, we use the Nawalkha-Beliaeva tree to discretize the variance process of the Heston model. After decorrelating the stock price process and the variance process, a pentanomial and a hexanomial trees are built. Numerical results for European options are presented and analyzed. Comparisons are made with competing numerical methods. Our hexanomial tree is found to be both accurate and ef- ficient. The value-at-risk numbers calculated by our tree for the Heston model are compared with those under the Black-Scholes model. The results show that they are significantly different, which suggests trading opportunities.
Subjects
Heston model
Derivative
Tree
Complexity
VaR
Type
thesis