A semi-analytical pricing formula for European options under the rough Heston-CIR model
Keywords:rough Heston-CIR model, semi-analytical, fractional Riccati equation, European options.
AbstractWe combine the rough Heston model and the CIR (Coxâ€“Ingersollâ€“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. doi:10.1017/S1446181120000024
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