Sensitivity analysis in the infinite dimensional Heston model

Author:

Benth Fred Espen1,Di Nunno Giulia12,Simonsen Iben Cathrine1

Affiliation:

1. Department of Mathematics, University of Oslo, Oslo, Norway

2. Department of Business and Management Science, NHH Norwegian School of Economics, Bergen, Norway

Abstract

We consider the infinite dimensional Heston stochastic volatility model proposed in Ref. 7. The price of a forward contract on a non-storable commodity is modeled by a generalized Ornstein–Uhlenbeck process in the Filipović space with this volatility. We prove a representation formula for the forward price. Then we consider prices of options written on these forward contracts and we study sensitivity analysis with computation of the Greeks with respect to different parameters in the model. Since these parameters are infinite dimensional, we need to reinterpret the meaning of the Greeks. For this we use infinite dimensional Malliavin calculus and a randomization technique.

Funder

STORM: Stochastics for Time-Space Risk Models

Publisher

World Scientific Pub Co Pte Lt

Subject

Applied Mathematics,Mathematical Physics,Statistics and Probability,Statistical and Nonlinear Physics

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