Gamma expansion of the Heston stochastic volatility model |
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Authors: | Paul?Glasserman Email author" target="_blank">Kyoung-Kuk?KimEmail author |
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Institution: | 1.Graduate School of Business,Columbia University,New York,USA;2.ISE Department,Korea Advanced Institute of Science and Technology,Daejeon,South Korea |
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Abstract: | We derive an explicit representation of the transitions of the Heston stochastic volatility model and use it for fast and
accurate simulation of the model. Of particular interest is the integral of the variance process over an interval, conditional
on the level of the variance at the endpoints. We give an explicit representation of this quantity in terms of infinite sums
and mixtures of gamma random variables. The increments of the variance process are themselves mixtures of gamma random variables.
The representation of the integrated conditional variance applies the Pitman–Yor decomposition of Bessel bridges. We combine
this representation with the Broadie–Kaya exact simulation method and use it to circumvent the most time-consuming step in
that method. |
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Keywords: | |
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