Alos, Elisa and Ewald, Christian-Oliver (2007): Malliavin differentiability of the Heston volatility and applications to option pricing.
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We prove that the Heston volatility is Malliavin differentiable under the classical Novikov condition and give an explicit expression for the derivative. This result guarantees the applicability of Malliavin calculus in the framework of the Heston stochastic volatility model. Furthermore we derive conditions on the parameters which assure the existence of the second Malliavin derivative of the Heston volatility. This allows us to apply recent results of the first author  in order to derive approximate option pricing formulas in the context of the Heston model. Numerical results are given.
|Item Type:||MPRA Paper|
|Institution:||University of St.Andrews, School of Economics and Finance|
|Original Title:||Malliavin differentiability of the Heston volatility and applications to option pricing|
|Keywords:||Malliavin calculus; stochastic volatility models; Heston model; Cox- Ingersoll-Ross process; Hull and White formula; Option pricing|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods
|Depositing User:||Christian-Oliver Ewald|
|Date Deposited:||16. May 2007|
|Last Modified:||12. Feb 2013 04:44|
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