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Hybrid Heston–Hull–White Models for European Option Calibration

Article Quant Q&A · Author: Benedict
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Summary

The document concerns hybrid models that combine Heston stochastic volatility with Hull–White interest rates. The question is how to approximate European option prices for model calibration, particularly when the pricing approach uses Monte Carlo simulation. It notes that the author found the literature on this specific application limited.

The reply points to work by Grzelak and coauthors as a source covering Monte Carlo methods and European option pricing for calibration. No equations, approximation procedure, calibration results, or comparison with alternative methods are included in the document itself. It therefore serves mainly as a pointer to further reading, rather than a self-contained explanation. The practical details and limitations of the referenced approach cannot be assessed from the material provided.

Key ideas

  • The topic is a hybrid of Heston stochastic volatility and Hull–White interest rates.
  • The calibration question focuses on approximating European option prices within a Monte Carlo framework.
  • The reply recommends a paper by Grzelak and coauthors but does not explain its methods or findings.

Tags

OptionsVolatilityDerivatives pricing
Full text
# Hybrid Heston-Hull White Model


# Hybrid Heston-Hull White Model












I am wondering if anyone could recommend a few good papers on hybrid heston-hull white models, in particular with respect to the approximation of model European options for calibration. Literature on this seems to be a little scarce, especially if I am intending to price with in the Monte carlo framework.

Best Ben

## Answer by BrownianBread (score 1)

https://quant.stackexchange.com/a/41133

Have you taken a look at the paper by Grzelak et al? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1434829 This contains the details on MC and European option pricing for calibrating the model. I hope this helps point you in the right direction.

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