2019Communication in Statistics- Theory and MethodsRequires access

Option pricing under the Heston model where the interest rate follows the Vasicek model

Zhidong Guo

Open publisher page 6 citations

Abstract

In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.

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What this paper is about

In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.

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OpenAlex reports 6 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

In this paper, we incorporate the stochastic nature of the short rate and volatility into the option pricing model. Vasicek–Heston hybrid model is proposed. This model allows for negative interest rate. With the technique of the numeraire change, pricing formula for European call options is derived. Finally, some numerical illustrations are given by computing European call option prices.

Key concepts: Vasicek model, Heston model, Short-rate model, Interest rate, Mathematics, Econometrics, Applied mathematics, Economics

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