Ms. Caijuan Kang Profile

Caijuan Kang

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Proceedings Article | 23 November 2022 Paper

Monte Carlo algorithm for pricing options under stochastic volatility models

Caijuan Kang, Hongying Wu

Proceedings Volume 12475, 124751D (2022) https://doi.org/10.1117/12.2659363

KEYWORDS: Monte Carlo methods, Stochastic processes, Computer simulations, Mathematical modeling, Numerical analysis

Read Abstract +

Monte Carlo (MC) simulation is a powerful technic to valuate option, but few literature discuss option pricing under stochastic volatility model (SVM). In this paper, we apply MC method to price European options under SVMs. Firstly, given correlative coefficient, a formula generating norm distribution random variables is established. Then, MC scheme is proposed for pricing European options under Heston, Hull-White and Hyper-geometric models. Numerical experiments illustrate the efficiency and accuracy of MC algorithm. With large number of simulated paths and time partition, MC solutions become stable. The proposed MC method can be extended to general option pricing, such as local stochastic volatility models and so on.

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