Numerical Solutions for the Stochastic Local Volatility Model
R.W.B. van der Weijst (TU Delft - Electrical Engineering, Mathematics and Computer Science)
CW Oosterlee – Mentor
P Cirillo – Graduation committee member
RJ Fokkink – Graduation committee member
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Abstract
This thesis is about pricing European options and forward start options under the Heston LSV model. The impact of conditionally calibrating the Heston parameters on the satisfaction of the Feller condition and thereafter correcting with a local volatility surface is investigated here. The results show that this approach is computationally time efficient and accurate. Efficient numerical approaches for this LSV model, such as the multilevel Monte Carlo method, are also investigated. Furthermore, a comparison of several discretizations schemes for the SV part have been conducted. For the calibration of the local volatility surface, the efficiency of the Particle method and the Bin method are compared. An alternative numerical approach to this problem which builds on these two methods is developed and tested.