A Multiscale Heston's Stochastic Volatility Model with a Stochastic Interest Rate Principal Investigator (PI) and Co-PIs

Abstract

Dr Veng and his team completed their 3-year Higher Education Improvement Project (HEIP) successfully between 01 January 2020 and 31 December 2022. The project cost 20,978.645 US dollars. The Heston stochastic volatility model has been considered to be one of the most popular models in option pricing problems. It is known that the Heston model is able to describe a number of well-known empirical features of asset price and provides an analytical formula for standard European options. Still, it has a number of drawbacks. To address these, the Heston model is brought into a multiscale stochastic volatility model by incorporating an additional fast mean-reverting factor on top of the square root process. This model brings a significant improvement over the Heston model. However, in this multiscale stochastic model, the interest rate is assumed to be constant, which does not fully take into account its real stochastic nature.