Year: 2011
Type: article
Abstract: We discuss the Heston model [Rev. Financ. Stud., 6 (1993), pp. 327–343] with stochastic interest rates driven by Hull–White (HW) [J. Derivatives, 4 (1996), pp. 26–36] or Cox–Ingersoll–Ross (CIR) [Econometrica, 53 (1985), pp. 385–407] processes. Two projection techniques to derive affine approximations of the original hybrid models are presented. In these approximations we can prescribe a nonzero correlation structure between all underlying processes. The affine approximate models admit pricing basic derivative products by Fourier techniques [P. P. Carr and D. B. Madan, J. Comput. Finance, 2 (1999), pp. 61–73, F. Fang and C. W. Oosterlee, SIAM J. Sci. Comput., 31 (2008), pp. 826–848] and can therefore be used for fast calibration of the hybrid model.
DOI: 10.1137/090756119
Authors: Lech A. Grzelak, Cornelis W. Oosterlee
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2116418074