Application of the Heath-Platen Estimator in the Fong-Vasicek Short Rate Model

18 Pages Posted: 9 Oct 2017

See all articles by Sema Coskun

Sema Coskun

University of Koblenz, Mathematical Institute

Ralf Korn

University of Kaiserslautern - Department of Mathematics

Sascha Desmettre

Johannes Kepler University Linz

Multiple version iconThere are 2 versions of this paper

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

Coskun, Sema and Korn, Ralf and Desmettre, Sascha, Application of the Heath-Platen Estimator in the Fong-Vasicek Short Rate Model (October 7, 2017). Available at SSRN: https://ssrn.com/abstract=3049641 or http://dx.doi.org/10.2139/ssrn.3049641

Sema Coskun (Contact Author)

University of Koblenz, Mathematical Institute ( email )

D-56070 Koblenz
Germany

Ralf Korn

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Sascha Desmettre

Johannes Kepler University Linz ( email )

Altenbergerstr. 69
A-4040 Linz, Upper Austria 4040
Austria

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