Discretizing the Heston Model: An Analysis of the Weak Convergence Rate

Martin Altmayer; Andreas Neuenkirch

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arXiv · 1604.05540

Discretizing the Heston Model: An Analysis of the Weak Convergence Rate

Martin Altmayer·Andreas Neuenkirch

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Abstract

In this manuscript we analyze the weak convergence rate of a discretization scheme for the Heston model. Under mild assumptions on the smoothness of the payoff and on the Feller index of the volatility process, respectively, we establish a weak convergence rate of order one. Moreover, under almost minimal assumptions we obtain weak convergence without a rate. These results are accompanied by several numerical examples. Our error analysis relies on a classical technique from Talay & Tubaro, a recent regularity estimate for the Heston PDE by Feehan & Pop and Malliavin calculus.

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Martin Altmayer, Andreas Neuenkirch. 2016-04-19. Discretizing the Heston Model: An Analysis of the Weak Convergence Rate. https://arxiv.org/abs/1604.05540

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