Pricing Barrier Options in the Heston Model using the Heath-Platen Estimator

Both barrier options and the Heston stochastic volatility model are omnipresent in real-life applications of financial mathematics. Therefore, we apply the Heath-Platen (HP) estimator (as first introduced in D. Heath and E.... [ view full abstract ]

Both barrier options and the Heston stochastic volatility model are omnipresent in real-life applications of financial mathematics. Therefore, we apply the Heath-Platen (HP) estimator (as first introduced in D. Heath and E. Platen (2002) A variance reduction technique based on integral representations. Quantitative Finance, 2(5):362–369) to price barrier options in the Heston model setting as an alternative to conventional Monte Carlo methods and PDE based methods. We demonstrate the superior performance of the HP estimator via numerical examples and explain this performance by a detailed look at the underlying theoretical concept of the HP estimator.