Economics, Econometrics and Finance
6 years ago

New approximation schemes revolutionize modeling of stochastic volatility in finance!

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Proceedings of the ISCIE International Symposium on Stochastic Systems Theory and its Applications
A Weak Taylor Scheme with Simulating Stochastic Areas and Heston Approximation of Stochastic Volatility Models
Hiroyuki Fukunaga, Kotaro Imamura, Kensuke Kado, Nobutaka Shimizu, Kazuhiro Yoshikawa

Paper Summary

The article introduces two ways to simplify complex mathematical models. One method involves simulating stochastic areas with a second order scheme. The other method uses Heston approximation to model stochastic volatility. The researchers provide some numerical results for the latter method.

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