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We construct a first-order weak split-step approximation for the solution of the Heston model that uses, at each step, generation of two discrete two-valued random variables. The Heston equation system is split into the deterministic part, solvable explicitly, and the stochastic part that is approximated by discrete random variables. The approximation is illustrated by several simulation examples, including applications to option pricing.
Journal: Mathematics and Computers in Simulation - Volume 113, July 2015, Pages 1–15