Title

A SEMI-ANALYTICAL PRICING FORMULA for EUROPEAN OPTIONS under the ROUGH HESTON-CIR MODEL

RIS ID

142303

Publication Details

He, X. & Lin, S. (2020). A SEMI-ANALYTICAL PRICING FORMULA for EUROPEAN OPTIONS under the ROUGH HESTON-CIR MODEL. ANZIAM Journal,

Abstract

2020 Australian Mathematical Society. We combine the rough Heston model and the CIR (Cox-Ingersoll-Ross) interest rate together to form a rough Heston-CIR model, so that both the rough behaviour of the volatility and the stochastic nature of the interest rate can be captured. Despite the convoluted structure and non-Markovian property of this model, it still admits a semi-analytical pricing formula for European options, the implementation of which involves solving a fractional Riccati equation. The rough Heston-CIR model is more general, taking both the rough Heston model and the Heston-CIR model as special cases. The influence of rough volatility and stochastic interest rate is shown to be significant through numerical experiments.

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Link to publisher version (DOI)

http://dx.doi.org/10.1017/S1446181120000024