Efficient option pricing in the rough Heston model using weak simulation schemes

We provide an efficient and accurate simulation scheme for the rough Heston model in the standard (H>0) as well as the hyper-rough regime ( $ H > -1/2 $ H>−1/2). The scheme is based on low-dimensional Markovian approximations of the rough Heston process derived in [Bayer and Breneis, arXiv:2309.07023], and provides a weak approximation to the rough Heston process. Numerical experiments show that the new scheme exhibits second-order weak convergence, while the computational cost increases linearly with respect to the number of time steps. In comparison, existing schemes based on discretization of the underlying stochastic Volterra integrals such as Gatheral's HQE scheme show a quadratic dependence of the computational cost. Extensive numerical tests for standard and path-dependent European options and Bermudan options show the method's accuracy and efficiency.

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Publication Details

Journal
Quantitative Finance
Published
2024-09-01
DOI
https://doi.org/10.1080/14697688.2024.2391523
Citations
8
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
4.31

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article

Efficient option pricing in the rough Heston model using weak simulation schemes

Simon Breneis, Christian Bayer
8 citations
Quantitative Finance
Stochastic processes and financial applications
4.31
article

Efficient option pricing in the rough Heston model using weak simulation schemes

Simon Breneis, Christian Bayer
article en
8 citations

Abstract

We provide an efficient and accurate simulation scheme for the rough Heston model in the standard (H>0) as well as the hyper-rough regime ( $ H > -1/2 $ H>−1/2). The scheme is based on low-dimensional Markovian approximations of the rough Heston process derived in [Bayer and Breneis, arXiv:2309.07023], and provides a weak approximation to the rough Heston process. Numerical experiments show that the new scheme exhibits second-order weak convergence, while the computational cost increases linearly with respect to the number of time steps. In comparison, existing schemes based on discretization of the underlying stochastic Volterra integrals such as Gatheral's HQE scheme show a quadratic dependence of the computational cost. Extensive numerical tests for standard and path-dependent European options and Bermudan options show the method's accuracy and efficiency.

Quantitative FinanceVol. 24(9)
Weierstrass Institute for Applied Analysis and Stochastics (DE)
Deutsche Forschungsgemeinschaft
Openalex Percentile: Top 5%
Stochastic processes and financial applications
4.31
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