Efficient implementation of the Heston-Hull & White model

Master Thesis

2014

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http://hdl.handle.net/11427/8521
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thesis_com_2014_com_maze_s.pdf (792.56 KB)
Authors
Maze, Sheldon
Supervisors
Dos Santos, Moses
Van Rooyen, Marchand
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University of Cape Town

Department
Division of Actuarial Science
Faculty
Faculty of Commerce
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Abstract
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.
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Includes bibliographical references.

Reference:

Maze, S. 2014. Efficient implementation of the Heston-Hull & White model. University of Cape Town.

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