Fast and accurate long-stepping simulation of the Heston stochastic volatility model

Jiun Hong Chan and Mark Joshi

Abstract

ABSTRACT

In this paper, we present three new discretization schemes for the Heston stochastic volatility model: two schemes for simulating the variance process and one for simulating the integrated variance process conditional on the initial point and the end point of the variance process. Instead of using a short time-stepping approach to simulate the variance process and its integral, these new schemes evolve the Heston process accurately over long steps without the need to sample the intervening values. Hence, prices of financial derivatives can be evaluated rapidly using our new approaches.