Journal
SIAM JOURNAL ON FINANCIAL MATHEMATICS
Volume 2, Issue 1, Pages 439-463Publisher
SIAM PUBLICATIONS
DOI: 10.1137/100794158
Keywords
Heston model; Bermudan options; Fourier cosine expansions; numerical quadrature
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We develop an efficient Fourier-based numerical method for pricing Bermudan and discretely monitored barrier options under the Heston stochastic volatility model. The two-dimensional pricing problem is dealt with by a combination of a Fourier cosine series expansion, as in [F. Fang and C. W. Oosterlee, SIAM J. Sci. Comput., 31 (2008), pp. 826-848, F. Fang and C. W. Oosterlee, Numer. Math., 114 (2009), pp. 27-62], and high-order quadrature rules in the other dimension. Error analysis and experiments confirm a fast error convergence.
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