Application of the Heath-Platen Estimator in the Fong-Vasicek Short Rate Model
18 Pages Posted: 9 Oct 2017
There are 2 versions of this paper
Application of the Heath-Platen Estimator in the Fong-Vasicek Short Rate Model
Application of the Heath–Platen Estimator in the Fong–Vasicek Short Rate Model
Date Written: October 7, 2017
Abstract
Due to the presence of stochastic volatility dynamics, the Fong-Vasicek short rate model is more complex but also more realistic than the classical Vasicek version. To enhance the numerical tractability of the Fong-Vasicek model for the calculation of bond option prices, we suggest the use of the Heath-Platen estimator which performs excellently in the related Heston stochastic volatility model. We show that the Heath-Platen estimator reduces the variance and thus the size of confidence intervals dramatically compared to a crude Monte Carlo estimation, which leads to a drastic speed-up in price calculations across different realistic parameter sets.
Keywords: Fong-Vasicek Model, Monte Carlo Method, Heath-Platen Estimator
JEL Classification: G13
Suggested Citation: Suggested Citation