ORIE Colloquium on 1/26/2012 - Yan Dolinsky: Numerical Schemes for Stochastic Volatility Models

ORIE Colloquium: Numerical Schemes for Stochastic Volatility Models Thursday, January 26 at 4:15pm Frank H.T. Rhodes Hall, 655 We present a tree based approximations for stochastic volatility models, such as the Stein and Stein model, Heston model etc. The importance of such numerical schemes follows from the wide use of stochastic volatility models among practitioners and the fact that for these models analytical solutions usually are not available. We show how to calculate efficiently options prices (European and American) with general type of payoffs such as Vanilla Options, Barrier Options, Lookback Options, Asian options etc. Our main tool is the weak convergence approach which allows to approximate diffusion processes by correlated random walks.