On pricing contingent claims under the double Heston model

This article presents a lattice based approach for pricing contingent claims when theunderlying asset evolves according to the double Heston (dH) stochastic volatility modelintroduced by Christoffersen et al. We discretize the continuous evolution of bothsquared volatilities by a “binomial pyramid”, and consider the asset value as an auxiliarystate variable for which a subset of possible realizations is attached to each node of thepyramid. The elements of the subset cover the range of asset prices at each time slice, andclaim price is computed solving backward through the “binomial pyramid”. Numericalexperiments confirm the accuracy and efficiency of the proposed model.