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.
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.
Copyright Date
2012
Language
en
File Format
application/pdf
Recommended Citation
Zhylyevskyy, Oleksandr, "Efficient Pricing of European-Style Options under Heston’s Stochastic Volatility Model" (2012). Economics Publications. 33.
https://lib.dr.iastate.edu/econ_las_pubs/33
Comments
This is an article from Theoretical Economics Letters 2 (2012): 16, doi:10.4236/tel.2012.21003. Posted with permission.