On The Heston Model with Stochastic Interest Rates

Grzelak, Lech and Oosterlee, Kees (2009): On The Heston Model with Stochastic Interest Rates.

Abstract

We discuss the Heston [Heston-1993] model with stochastic interest rates driven by Hull-White [Hull,White-1996] (HW) or Cox-Ingersoll-Ross [Cox, et al.-1985] (CIR) processes. Two projection techniques to derive affine approximations of the original hybrid models are presented. In these approximations we can prescibe a non-zero correlation structure between all underlying processes. The affine approximate models admit pricing basic derivative products by Fourier techniques [Carr,Madan-1999; Fang,Oosterlee-2008], and can therefore be used for fast calibration of the hybrid model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heston-Hull-White; Heston-Cox-Ingersoll-Ross; equity-interest rate hybrid products; stochastic volatility; affine jump diffusion processes.
• Subjects: G - Financial Economics > G1 - General Financial Markets; F - International Economics > F3 - International Finance; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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