On pricing of discrete Asian and Lookback options under the Heston model

Abstract

We propose a new, data-driven approach for efficient pricing of–fixed- and floating-strike–discrete arithmetic Asian and Lookback options when the underlying process is driven by the Heston model dynamics. The method proposed in this article constitutes an extension of Perotti and Grzelak [Fast sampling from time-integrated bridges using deep learning, J. Comput. Math. Data Sci. 5 (2022)], where the problem of sampling from time-integrated stochastic bridges was addressed. The model relies on the Seven-League scheme [S. Liu et al. The seven-league scheme: Deep learning for large time step Monte Carlo simulations of stochastic differential equations, Risks 10 (2022), p. 47], where artificial neural networks are employed to ‘learn’ the distribution of the random variable of interest utilizing stochastic collocation points [L.A. Grzelak et al. The stochastic collocation Monte Carlo sampler: Highly efficient sampling from expensive distributions, Quant. Finance 19 (2019), pp. 339–356]. The method results in a robust procedure for Monte Carlo pricing. Furthermore, semi-analytic formulae for option pricing are provided in a simplified, yet general, framework. The model guarantees high accuracy and a reduction of the computational time up to thousands of times compared to classical Monte Carlo pricing schemes.