The Heston Model with Time-Dependent Correlation Driven by Isospectral Flows

Time Dependent Heston Model

The use of the Heston model is still challenging because it has a closed formula only when the parameters are constant [Hes93] or piecewise constant [MN03]. Hence, using a small volatility of volatility expansion and Malliavin calculus techniques, we derive an accurate analytical formula for the price of vanilla options for any time dependent Heston model (the accuracy is less than a few bps fo...

Locally implementable learning with isospectral matrix flows

Numerical solution of isospectral flows

In this paper we are concerned with the problem of solving numerically isospectral flows. These flows are characterized by the differential equation L′ = [B(L), L], L(0) = L0, where L0 is a d × d symmetric matrix, B(L) is a skew-symmetric matrix function of L and [B,L] is the Lie bracket operator. We show that standard Runge–Kutta schemes fail in recovering the main qualitative feature of these...

The Heston Model with Term Structure

The purpose of this project is to extend the Heston model in order to incorporate the term structure (TS) of the implied volatility surface. This includes implementing a TS within the Heston model and its calibration to a set of market instruments. The TS Heston model with piecewise constant parameters is implemented to match the TS and the COS pricing method is used for fast option pricing. We...

Adi Finite Difference Schemes for Option Pricing in the Heston Model with Correlation

This paper deals with the numerical solution of the Heston partial differential equation (PDE) that plays an important role in financial option pricing theory, Heston (1993). A feature of this time-dependent, twodimensional convection-diffusion-reaction equation is the presence of a mixed spatial-derivative term, which stems from the correlation between the two underlying stochastic processes f...