Does anyone know any kind of method that produces reasonably well results for American Options under Heston Model setting that could be used as benchmark value? Since right now my goal is to investigate the biasedness of the Least-Square Monte Carlo(LSM) More details on LSMunder different conditions, I want some methods known to produce better results than LSM. I presume the binomial model under stochastic volatility might be a good choice but maybe a bit hard to implement and time-consuming. So just wondering if anyone knows something better than sv binomial model that could serve as a benchmark? Thanks!


1 Answer 1


Well, I guess the OP is done with this by now, but the answer is finite difference methods. Not that easy to implement for Heston, but not terribly difficult either. Those are so efficient that they can give 7-8 digits of accuracy easily (a lot more than you'd need to validate LSM, which could give you maybe 3 correct digits if you're lucky). If anyone needs some benchmarks I can provide them.

  • $\begingroup$ Thanks. You may post your code here. Does you benchmark handle discrete dividends as well? $\endgroup$
    – Gordon
    Nov 29, 2017 at 19:44
  • $\begingroup$ Yes it does discrete dividends as well, in which case one has to decide what dividend policy to assume (what happens as S approaches zero). If I remember well my code assumes the dividend is capped by S. I'm sorry but I cannot post the code here as it's too big and messy to be shared. But if you want to compare notes on American Heston pricing with dividends we can do that. The only shareable code I can think of that does that is QLib, but my code is capable of higher accuracy. $\endgroup$
    – Yian Pap
    Nov 29, 2017 at 21:11

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