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Numerical Simulation of the Heston Model under Stochastic Correlation

Chair of Applied Mathematics and Numerical Analysis, Faculty of Mathematics and Natural Sciences, University of Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany
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Int. J. Financial Stud. 2018, 6(1), 3; https://doi.org/10.3390/ijfs6010003
Received: 11 September 2017 / Revised: 6 November 2017 / Accepted: 15 December 2017 / Published: 25 December 2017
(This article belongs to the Special Issue Recent Developments in Numerical Methods for Option Pricing)
Stochastic correlation models have become increasingly important in financial markets. In order to be able to price vanilla options in stochastic volatility and correlation models, in this work, we study the extension of the Heston model by imposing stochastic correlations driven by a stochastic differential equation. We discuss the efficient algorithms for the extended Heston model by incorporating stochastic correlations. Our numerical experiments show that the proposed algorithms can efficiently provide highly accurate results for the extended Heston by including stochastic correlations. By investigating the effect of stochastic correlations on the implied volatility, we find that the performance of the Heston model can be proved by including stochastic correlations. View Full-Text
Keywords: Heston model; stochastic correlation process; Ornstein-Uhlenbeck process; quadratic-exponential scheme Heston model; stochastic correlation process; Ornstein-Uhlenbeck process; quadratic-exponential scheme
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Teng, L.; Ehrhardt, M.; Günther, M. Numerical Simulation of the Heston Model under Stochastic Correlation. Int. J. Financial Stud. 2018, 6, 3.

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