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An Almost Exact Mixed Scheme to Gatheral Double-Mean-Reverting Model
Mälardalen University, School of Education, Culture and Communication.
2024 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The Almost-Exact Scheme (AES), as proposed by Oosterlee and Grzelak, has been applied to the Heston stochastic volatility model to show improved error convergence for small time-steps, as opposed to the classical Euler-Maruyama (EM) scheme, in European option pricing. This idea has been extended to the double Heston stochastic volatility model, to show similar improved results for Bermudan options. In this thesis, we extend this idea even further and develop an Almost-Exact Scheme to the Gatheral double mean reverting (DMR) model, to show improved error convergence for American put options. We illustrate that, because of the complexity of the dynamics of our model, a direct application of the AES is not possible, and therefore derive a diffusion trick, so we can instead use a partial implementation of the AES. Our partial implementation has two variants. In the first variant, we implement the AES on the long-run mean process combined with the Milstein scheme on the variance process. In the second variant, the Milstein scheme is replaced by a second order refinement. We name these two schemes AEMS and AEMS-SOR respectively. We conduct extensive simulation studies to evaluate the proposed schemes. The results indicate improved error convergence of the proposed scheme for small time-steps when time-to-maturity is equal to half a year, but does not seem to differ much from the EM scheme for a shorter time-to-maturity.

Place, publisher, year, edition, pages
2024. , p. 45
Keywords [en]
Almost Exact Scheme; American Options; Gatheral DMR Model; Least Squares Monte Carlo; Monte Carlo Simulation; CIR; Stochastic Volatility.
National Category
Mathematics
Identifiers
URN: urn:nbn:se:mdh:diva-67096OAI: oai:DiVA.org:mdh-67096DiVA, id: diva2:1864157
Subject / course
Mathematics/Applied Mathematics
Presentation
2024-05-29, 13:00 (English)
Supervisors
Examiners
Available from: 2024-06-10 Created: 2024-06-03 Last updated: 2025-10-10Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
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Output format
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