Efficient implementation of the Heston-Hull & White model

A model with a stochastic interest rate process correlated to a stochastic volatility process is needed to accurately price long- dated contingent claims. Such a model should also price claims efficiently in order to allow for fast calibration. This dissertation explores the approximations for the characteristic function of the Heston-Hull&White model introduced by Grzelak and Oost- erlee (2011). Fourier-Cosine expansion pricing, due to Fang and Oosterlee (2008), is then used to price contingent claims under this model, which is implemented in MATLAB. We find that the model is efficient, accurate and has a relatively simple calibration procedure. In back-tests, it is determined that the Heston- Hull&White model produces better hedging profit and loss results than a Heston (1993) or a Black and Scholes (1973) model.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2014

Author dc:creator

• Maze, Sheldon

Advisors dc:contributor.advisor

• Dos Santos, Moses
• Van Rooyen, Marchand

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/8521

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/8521