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Abstract

We discuss the Heston Heston-1993 model with stochastic interest rates driven by Hull-White Hull,White-1996 HW or Cox-Ingersoll-Ross Cox, et al.-1985 CIR processes. A so-called volatility compensator is defined which guarantees that the Heston hybrid model with a non-zero correlation between the equity and interest rate processes is properly defined. Two different approximations of the hybrid models are presented in order to obtain the characteristic functions. These approximations admit pricing basic derivative products with Fourier techniques Carr,Madan-1999; Fang,Oosterlee-2008, and can therefore be used for fast calibration of the hybrid model. The effect of the approximations on the instantaneous correlations and the influence of the correlation between stock and interest rate on the implied volatilities are also discussed.



Item Type: MPRA Paper -

Original Title: On The Heston Model with Stochastic Interest Rates-

English Title: On The Heston Model with Stochastic Interest Rates-

Language: English-

Keywords: Heston-Hull-White; Heston-Cox-Ingersoll-Ross; equity-interest rate hybrid products; stochastic volatility; affine jump diffusion processes.-

Subjects: G - Financial Economics > G1 - General Financial MarketsF - International Economics > F3 - International FinanceG - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing-





Autor: Grzelak, Lech

Fuente: https://mpra.ub.uni-muenchen.de/20620/







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