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Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography

Time dependent Heston model


Mohammed Miri (Pricing Partners and LJK)
joint work with
Eric Benhamou (Pricing Partners)
and Emmanuel Gobet (LJK)
Paper available on ssrn.com.
Numerical Methods in Finance
Paris, 15-17 April 2009
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Framework
Heston model
the Heston model is an extension of Black Scholes model with
stochastic volatility:
dX
t
=

v
t
dW
t

v
t
2
dt, X
0
= x
0
, (1)
dv
t
= (
t
v
t
)dt +
t

v
t
dB
t
, v
0
, (2)
dW, B
t
=
t
dt,
where

v
0
the initial square of volatility.

is the mean reversion parameter.

the long-term level.

the vol of vol.

the correlation.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Fourier inversion

The call price for Heston model can be written using Lewis
formula:
Call
Heston
(t, S
t
, v
t
; T, K) =S
t
e

_
T
t
q
s
ds

Ke

_
T
t
r
s
ds
2
_ i
2
+
i
2

e
izX

T
(z)
dz
z
2
iz
where X = log
_
S
t
e

_
T
t
q
s
ds
Ke

_
T
t
r
s
ds
_
and
T
(z) = E(e
z(X
T
X
t
)
|F
t
)

Explicit computation of this integral requires explicit


computation of the characteristic function:

T
(z) = E(e
z(X
T
X
t
)
|F
t
).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Fourier inversion

The call price for Heston model can be written using Lewis
formula:
Call
Heston
(t, S
t
, v
t
; T, K) =S
t
e

_
T
t
q
s
ds

Ke

_
T
t
r
s
ds
2
_ i
2
+
i
2

e
izX

T
(z)
dz
z
2
iz
where X = log
_
S
t
e

_
T
t
q
s
ds
Ke

_
T
t
r
s
ds
_
and
T
(z) = E(e
z(X
T
X
t
)
|F
t
)

Explicit computation of this integral requires explicit


computation of the characteristic function:

T
(z) = E(e
z(X
T
X
t
)
|F
t
).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of constant parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is explicit
when the parameters , and are constant.

PDE approach: The Heston model belongs to afne


models and they have explicit characteristic function solved
using PDE argument and Riccatti equations (Heston 93).

Probabilist approach: The CIR process v is a time space


changed Bessel process (Going-Jaeschke and Yor 03).
To avoid discontinuities due to complex integration we refer to
the work of Jackel and Kahl 05.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of constant parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is explicit
when the parameters , and are constant.

PDE approach: The Heston model belongs to afne


models and they have explicit characteristic function solved
using PDE argument and Riccatti equations (Heston 93).

Probabilist approach: The CIR process v is a time space


changed Bessel process (Going-Jaeschke and Yor 03).
To avoid discontinuities due to complex integration we refer to
the work of Jackel and Kahl 05.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of constant parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is explicit
when the parameters , and are constant.

PDE approach: The Heston model belongs to afne


models and they have explicit characteristic function solved
using PDE argument and Riccatti equations (Heston 93).

Probabilist approach: The CIR process v is a time space


changed Bessel process (Going-Jaeschke and Yor 03).
To avoid discontinuities due to complex integration we refer to
the work of Jackel and Kahl 05.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of constant parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is explicit
when the parameters , and are constant.

PDE approach: The Heston model belongs to afne


models and they have explicit characteristic function solved
using PDE argument and Riccatti equations (Heston 93).

Probabilist approach: The CIR process v is a time space


changed Bessel process (Going-Jaeschke and Yor 03).
To avoid discontinuities due to complex integration we refer to
the work of Jackel and Kahl 05.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of piecewise constant
parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is
computed recursively when the parameters , and are
piecewise constant.

PDE approach: The characteristic function


T
(z) can be
computed recursively using nested Riccatti equations with
constant coefcients (Mikhailov et al 03).

Probabilist approach: We use a Markov argument in order


to compute recursively the characteristic function (Elices
08).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of piecewise constant
parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is
computed recursively when the parameters , and are
piecewise constant.

PDE approach: The characteristic function


T
(z) can be
computed recursively using nested Riccatti equations with
constant coefcients (Mikhailov et al 03).

Probabilist approach: We use a Markov argument in order


to compute recursively the characteristic function (Elices
08).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Fourier Inversion
Characteristic Function: case of piecewise constant
parameters
The characteristic function
T
(z) = E(e
z(X
T
X
t
)
|F
t
) is
computed recursively when the parameters , and are
piecewise constant.

PDE approach: The characteristic function


T
(z) can be
computed recursively using nested Riccatti equations with
constant coefcients (Mikhailov et al 03).

Probabilist approach: We use a Markov argument in order


to compute recursively the characteristic function (Elices
08).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Review of Analytical approximations
Long maturity

Ergodic approach (Fouque et al 00): the volatility is fast


mean reverting. Perturbation of the innitesimal generator.
L

=
1

L
(0)
+
1

L
(1)
+ L
(2)
,
=Call = Call
(0)
BS
+

Correction
(1)
+

Expression of the price as a Black Scholes price plus


some Greeks. Error bounds are available.

Accurate only for long maturities and for time


homogeneous parameters.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Review of Analytical approximations
Short maturity

Geodesic approach (Berestycki et al 04, Labordere 05,


Forde 08,...): asymptotic expansion of the implied volatility
near expiry.

In all these works, the related geodesic distance for


constant Hestons model is not explicit. However, it can be
approximated using series expansion (Lewis 07).

Accurate only for short maturities and for time


homogeneous parameters.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Review of Analytical approximations
Others

Averaging techniques (Piterbarg 05): Averaged constant


Heston parameters are derived for Call price in Time
dependent Heston model. Accurate only for zero
correlation.

Price expansion w.r.t. correlation (Antonelli and


Scarlatti 09). Error bounds are available. Accurate only for
time homogeneous parameters.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Motivation
Challenge

Give an accurate analytic approximation for the price of


Call-Put option in general time dependent Heston
e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] (3)

with computational time cheaper than Fourier inversion


(gain by a factor 100 or more).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Motivation
Challenge

Give an accurate analytic approximation for the price of


Call-Put option in general time dependent Heston
e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] (3)

with computational time cheaper than Fourier inversion


(gain by a factor 100 or more).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Motivation
Challenge

Give an accurate analytic approximation for the price of


Call-Put option in general time dependent Heston
e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] (3)

with computational time cheaper than Fourier inversion


(gain by a factor 100 or more).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Our approach: Proxy model

Our approach is based on small volatility of volatility


expansion .

The proxy model is the Heston model without volatility of


volatility. Therefore, The proxy is a BS model with
deterministic volatility v
0,t
.

dX
BS
t
=

v
0,t
dW
t

v
0,t
2
dt, X
BS
0
= x
0
,
dv
0,t
= (
t
v
0,t
)dt, v
0
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Our approach: Proxy model

Our approach is based on small volatility of volatility


expansion .

The proxy model is the Heston model without volatility of


volatility. Therefore, The proxy is a BS model with
deterministic volatility v
0,t
.

dX
BS
t
=

v
0,t
dW
t

v
0,t
2
dt, X
BS
0
= x
0
,
dv
0,t
= (
t
v
0,t
)dt, v
0
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Our approach: Proxy model

Our approach is based on small volatility of volatility


expansion .

The proxy model is the Heston model without volatility of


volatility. Therefore, The proxy is a BS model with
deterministic volatility v
0,t
.

dX
BS
t
=

v
0,t
dW
t

v
0,t
2
dt, X
BS
0
= x
0
,
dv
0,t
= (
t
v
0,t
)dt, v
0
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Our approach: Proxy price
In this case the put price is P
BS
(x
0
,
_
T
0
v
0,t
dt)

where the function (x, y) P


BS
(x, y) is the put function price
in a BS model with spot e
x
, strike K, total variance y,
risk-free rate r
eq
=
_
T
0
r(t)dt
T
, dividend yield q
eq
=
_
T
0
q(t)dt
T
and
maturity T.

we recall that P
BS
(x, y) has the following explicit expression:
P
BS
(x, y) =Ke
r
eq
T
N
_
1

y
log(
Ke
r
eq
T
e
x
e
q
eq
T
) +
1
2

y
_
e
x
e
q
eq
T
N
_
1

y
log(
Ke
r
eq
T
e
x
e
q
eq
T
)
1
2

y
_
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Our approach: Proxy price
In this case the put price is P
BS
(x
0
,
_
T
0
v
0,t
dt)

where the function (x, y) P


BS
(x, y) is the put function price
in a BS model with spot e
x
, strike K, total variance y,
risk-free rate r
eq
=
_
T
0
r(t)dt
T
, dividend yield q
eq
=
_
T
0
q(t)dt
T
and
maturity T.

we recall that P
BS
(x, y) has the following explicit expression:
P
BS
(x, y) =Ke
r
eq
T
N
_
1

y
log(
Ke
r
eq
T
e
x
e
q
eq
T
) +
1
2

y
_
e
x
e
q
eq
T
N
_
1

y
log(
Ke
r
eq
T
e
x
e
q
eq
T
)
1
2

y
_
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
How to measure errors between the model and its
proxy
Suitable parameterization
dv

t
= (
t
v

t
)dt +
t
_
v

t
dB
t
,
so that v
1
t
= v
t
and v
0
t
= v
0,t
.
Expansion w.r.t. for = 1 around = 0:
v
t
= v
0,t
.,.
the deterministic volatility
+
(v

t
)

|
=0
+

2
(v

t
)

2
|
=0
+
Question: How to estimate the derivatives
(v

t
)

|
=0
,

2
(v

t
)

2
|
=0
?

They are null when is null.

(v

t
)

|
=0
= e
t
_
t
0
e
s

v
0,s
dB
s
.

(v

t
)

|
=0
is of the order of ||

.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
How to measure errors between the model and its
proxy
Suitable parameterization
dv

t
= (
t
v

t
)dt +
t
_
v

t
dB
t
,
so that v
1
t
= v
t
and v
0
t
= v
0,t
.
Expansion w.r.t. for = 1 around = 0:
v
t
= v
0,t
.,.
the deterministic volatility
+
(v

t
)

|
=0
+

2
(v

t
)

2
|
=0
+
Question: How to estimate the derivatives
(v

t
)

|
=0
,

2
(v

t
)

2
|
=0
?

They are null when is null.

(v

t
)

|
=0
= e
t
_
t
0
e
s

v
0,s
dB
s
.

(v

t
)

|
=0
is of the order of ||

.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
How to measure errors between the model and its
proxy
Suitable parameterization
dv

t
= (
t
v

t
)dt +
t
_
v

t
dB
t
,
so that v
1
t
= v
t
and v
0
t
= v
0,t
.
Expansion w.r.t. for = 1 around = 0:
v
t
= v
0,t
.,.
the deterministic volatility
+
(v

t
)

|
=0
+

2
(v

t
)

2
|
=0
+
Question: How to estimate the derivatives
(v

t
)

|
=0
,

2
(v

t
)

2
|
=0
?

They are null when is null.

(v

t
)

|
=0
= e
t
_
t
0
e
s

v
0,s
dB
s
.

(v

t
)

|
=0
is of the order of ||

.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Heston price= expectation of stochastic BS price

X
T
= x
0
+
_
T
0
(

v
t
dW
t

v
t
2
dt) conditioned on the ltration
(F
B
t
)
t
generated by the Brownian motion B is:
a Gaussian distribution with mean
x
0
+
_
T
0

t

v
t
dB
t

1
2
_
T
0
v
t
dt and variance
_
T
0
(1
2
t
)v
t
dt
(Renault and Touzi 96).

So, the Put price e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] is an
expectation of a stochastic Black Scholes Put price:
E[P
BS
(x
0
+
_
T
0

v
t
dB
t

_
T
0

2
t
2
v
t
dt,
_
T
0
(1
2
t
)v
t
dt)].
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Heston price= expectation of stochastic BS price

X
T
= x
0
+
_
T
0
(

v
t
dW
t

v
t
2
dt) conditioned on the ltration
(F
B
t
)
t
generated by the Brownian motion B is:
a Gaussian distribution with mean
x
0
+
_
T
0

t

v
t
dB
t

1
2
_
T
0
v
t
dt and variance
_
T
0
(1
2
t
)v
t
dt
(Renault and Touzi 96).

So, the Put price e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] is an
expectation of a stochastic Black Scholes Put price:
E[P
BS
(x
0
+
_
T
0

v
t
dB
t

_
T
0

2
t
2
v
t
dt,
_
T
0
(1
2
t
)v
t
dt)].
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Heston price= expectation of stochastic BS price

X
T
= x
0
+
_
T
0
(

v
t
dW
t

v
t
2
dt) conditioned on the ltration
(F
B
t
)
t
generated by the Brownian motion B is:
a Gaussian distribution with mean
x
0
+
_
T
0

t

v
t
dB
t

1
2
_
T
0
v
t
dt and variance
_
T
0
(1
2
t
)v
t
dt
(Renault and Touzi 96).

So, the Put price e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] is an
expectation of a stochastic Black Scholes Put price:
E[P
BS
(x
0
+
_
T
0

v
t
dB
t

_
T
0

2
t
2
v
t
dt,
_
T
0
(1
2
t
)v
t
dt)].
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Smart parameterization
Taylor expansion of the price
By performing a Taylor expansion for the P
BS
function at the
second order around
(x
0
+
_
T
0

t

v
0,t
dB
t

_
T
0

2
t
2
v
0,t
dt,
_
T
0
(1
2
t
)v
0,t
dt), we obtain
e

_
T
0
r
t
dt
E[(K e
_
T
0
(r
t
q
t
)dt+X
T
)
+
] = P
BS
(x
0
,
_
T
0
v
0,t
dt)
+ Correction terms + Errors.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation
Estimation of corrections terms
Theorem
The correction terms are a linear combination of Greeks of the
proxy Black Scholes Model:
Correction terms =
2

i=1
a
i,T

i+1
P
BS
x
i
y
(x
0
,
_
T
0
v
0,t
dt)
+
1

i=0
b
2i,T

2i+2
P
BS
x
2i
y
2
(x
0
,
_
T
0
v
0,t
dt),
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation
Estimation of corrections terms
where
a
1,T
=
_
T
0
_
T
t
1
e
t
1

t
1

t
1
v
0,t
1
e
t
2
dt
1
dt
2
,
a
2,T
=
_
T
0
_
T
t
1
_
T
t
2
e
t
1

t
1

t
1
v
0,t
1

t
2

t
2
e
t
3
dt
1
dt
2
dt
3
,
b
0,T
=
_
T
0
_
T
t
1
_
T
t
2
e
2t
1

2
t
1
v
0,t
1
e
t
2
e
t
3
dt
1
dt
2
dt
3
,
b
2,T
=
a
2
1,T
2
.

The proof relies on (heavy) Malliavin calculus techniques.


Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation
Estimation of corrections terms
where
a
1,T
=
_
T
0
_
T
t
1
e
t
1

t
1

t
1
v
0,t
1
e
t
2
dt
1
dt
2
,
a
2,T
=
_
T
0
_
T
t
1
_
T
t
2
e
t
1

t
1

t
1
v
0,t
1

t
2

t
2
e
t
3
dt
1
dt
2
dt
3
,
b
0,T
=
_
T
0
_
T
t
1
_
T
t
2
e
2t
1

2
t
1
v
0,t
1
e
t
2
e
t
3
dt
1
dt
2
dt
3
,
b
2,T
=
a
2
1,T
2
.

The proof relies on (heavy) Malliavin calculus techniques.


Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation
In case of the Heston model with constant parameters, one has:
a
1,T
=(p
0
v
0
+ p
1
),
a
2,T
=()
2
(q
0
v
0
+ q
1
), b
0,T
=
2
(r
0
v
0
+ r
1
).
where
p
0
=
e
T
_
T + e
T
1
_

2
, p
1
=
e
T
_
T + e
T
(T 2) + 2
_

2
,
q
0
=
e
T
_
T(T + 2) + 2e
T
2
_
2
3
,
q
1
=
e
T
_
2e
T
(T 3) + T(T + 4) + 6
_
2
3
,
r
0
=
e
2T
_
4e
T
T + 2e
2T
2
_
4
3
,
r
1
=
e
2T
_
4e
T
(T + 1) + e
2T
(2T 5) + 1
_
4
3
.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation

In case of Heston model with piecewise constant


parameters, we use recursive calculus for the coefcients
a
1,T
, a
2,T
, b
0,T
.

Averaged parameters are derived from the approximation.

For more details about these aspects


see Benhamou, Gobet and Miri 09.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation

In case of Heston model with piecewise constant


parameters, we use recursive calculus for the coefcients
a
1,T
, a
2,T
, b
0,T
.

Averaged parameters are derived from the approximation.

For more details about these aspects


see Benhamou, Gobet and Miri 09.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Correction terms estimation

In case of Heston model with piecewise constant


parameters, we use recursive calculus for the coefcients
a
1,T
, a
2,T
, b
0,T
.

Averaged parameters are derived from the approximation.

For more details about these aspects


see Benhamou, Gobet and Miri 09.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Errors analysis
Errors analysis
Theorem
The residual errors of the approximation formula are:
Errors = O(||
3

T
2
).
Proof relies on (heavy) technical Lemmas.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Approximation accuracy: Strikes
Table: Set of maturities and strikes used for the numerical tests.
T/K
3M 70 80 90 100 110 120 125 130
6M 60 70 80 100 110 130 140 150
1Y 50 60 80 100 120 150 170 180
2Y 40 50 70 100 130 180 210 240
3Y 30 40 60 100 140 200 250 290
5Y 20 30 60 100 150 250 320 400
7Y 10 30 50 100 170 300 410 520
10Y 10 20 50 100 190 370 550 730
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Approximation accuracy for Constant Heston model
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Approximation accuracy for Piecewise Heston model
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Computational time: Gain by a factor of 100 or more
Table: Computational time for our approximation formula against
Fourier inversion.
Method Constant parameters
(ms)
Piecewise Constant pa-
rameters (ms)
Approximation
formula
0.018 0.138
Fourier 4.708 40.225
Gain 261 291
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Conclusion
The challenge is over:

The accuracy of our approximation turns out to be


excellent; the errors do not exceed few bps for various
strikes and maturities.

The accuracy of our averaging formula is extremely


accurate.

The computational cost is cheaper than Fourier inversion


(gain by factor of 100 or more).
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Summary
Introduction
Framework
Fourier Inversion
Review of Analytical approximations
Motivation
Smart Taylor Expansion
Smart parameterization
Correction terms estimation
Errors analysis
Numerical results
Conclusion
Bibliography
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Bibliography
F. Antonelli and S. Scarlatti. Pricing options under stochastic
volatility: a power series approach. Finance and Stochastics,
2009
E. Benhamou, E. Gobet, and M. Miri. Time dependent Heston
model. available on ssrn, submitted, 2009.
A. Elices. Models with time-dependent parameters using
transform methods: application to Heston s model. 2008.
M. Forde. The small-time behavior of diffusion and
time-changed diffusion processes on the line. , 2008.
J.P. Fouque, G. Papanicalaou, and R. Sircar. Derivatives in
nancial Markets with stochastic volatility. Cambridge
University Press, 2000.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Bibliography
A. Going-Jaeschke and M. Yor. A survey and some
generalizations of Bessel processes. Bernoulli, 2003.
P. Jackel and C. Kahl. Not-So-Complex Logarithms in
theHestonModel. WilmottMagazine, September 2005.
S. Heston. A closed-form solutions for options with stochastic
volatility with applications to bond and currency options,.
Review of Financial Studies, 1993.
A. Lewis. Geometries and smile asymptotics for a class of
stochastic volatility models. www.optioncity.net, 2007.
A. Lewis. Option valuation under stochastic volatility with
Mathematica code. Finance Press, Newport Beach, California,
2000.
V.V. Piterbarg. Time to smile. Risk Magazine, 2005.
Introduction Smart Taylor Expansion Numerical results Conclusion Bibliography
Thank you for your
attention!