English

Simulation of square-root processes made simple: applications to the Heston model

Mathematical Finance 2025-06-18 v2 Computational Finance

Abstract

We introduce a simple, efficient and accurate nonnegative preserving numerical scheme for simulating the square-root process. The novel idea is to simulate the integrated square-root process first instead of the square-root process itself. Numerical experiments on realistic parameter sets, applied for the integrated process and the Heston model, display high precision with a very low number of time steps. As a bonus, our scheme yields the exact limiting Inverse Gaussian distributions of the integrated square-root process with only one single time-step in two scenarios: (i) for high mean-reversion and volatility-of-volatility regimes, regardless of maturity; and (ii) for long maturities, independent of the other parameters.

Keywords

Cite

@article{arxiv.2412.11264,
  title  = {Simulation of square-root processes made simple: applications to the Heston model},
  author = {Eduardo Abi Jaber},
  journal= {arXiv preprint arXiv:2412.11264},
  year   = {2025}
}
R2 v1 2026-06-28T20:35:56.590Z