Campus Units

Economics

Document Type

Article

Publication Version

Published Version

Publication Date

2012

Journal or Book Title

Theoretical Economics Letters

Volume

2

Issue

1

First Page or Article ID Number

16

Last Page

20

DOI

10.4236/tel.2012.21003

Abstract

Heston’s stochastic volatility model is frequently employed by finance researchers and practitioners. Fast pricing of European-style options in this setting has considerable practical significance. This paper derives a computationally efficient formula for the value of a European-style put under Heston’s dynamics, by utilizing a transform approach based on inverting the characteristic function of the underlying stock’s log-price and by exploiting the characteristic function’s symmetry. The value of a European-style call is computed using a parity relationship. The required characteristic function is obtained as a special case of a more general solution derived in prior research. Computational advantage of the option value formula is illustrated numerically. The method can help to mitigate the time cost of algorithms that require repeated evaluation of European-style options under Heston’s dynamics.

Comments

This is an article from Theoretical Economics Letters 2 (2012): 16, doi:10.4236/tel.2012.21003. Posted with permission.

Rights

This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Copyright Owner

Scientific Research Publishing Inc.

Language

en

File Format

application/pdf

Included in

Economics Commons

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