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Convergence of an Euler scheme for a hybrid stochastic-local volatility model with stochastic rates in foreign exchange markets

Abstract:

We study the Heston{Cox{Ingersoll{Ross++ stochastic-local volatility model in the context of foreign exchange markets and propose a Monte Carlo simulation scheme which combines the full truncation Euler scheme for the stochastic volatility component and the stochastic domestic and foreign short interest rates with the log-Euler scheme for the exchange rate. We establish the exponential integrability of full truncation Euler approximations for the Cox{Ingersoll{Ross process and find a lower bo...

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Publication status:
Published
Peer review status:
Peer reviewed

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Publisher copy:
10.1137/17M1114569

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Institution:
University of Oxford
Division:
MPLS Division
Department:
Mathematical Institute
Role:
Author
More by this author
Institution:
University of Oxford
Division:
MPLS Division
Department:
Mathematical Institute
Role:
Author
More by this author
Institution:
University of Oxford
Division:
MPLS
Department:
Mathematical Institute
Oxford college:
St Catherine's College
Role:
Author
Publisher:
Society for Industrial and Applied Mathematics
Journal:
SIAM Journal on Financial Mathematics More from this journal
Volume:
9
Issue:
1
Pages:
127-170
Publication date:
2018-01-24
Acceptance date:
2017-11-03
DOI:
ISSN:
1945-497X
Keywords:
Pubs id:
pubs:743788
UUID:
uuid:c966744e-7c9b-497b-b3fd-cef301c5c833
Local pid:
pubs:743788
Source identifiers:
743788
Deposit date:
2017-11-08

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