Efficient numerical valuation of European options under the two-asset Kou jump-diffusion model

Abstract

We study the L1-approximation of the log-Heston stochastic differential equation at equidistant time points by Euler-type methods. We establish the convergence order 1/2 – ∊ for ∊ > 0 arbitrarily small if the Feller index v of the underlying Cox– Ingersoll–Ross process satisfies v > 1. Thus, we recover the standard convergence order of the Euler scheme for stochastic differential equations with globally Lipschitz coefficients. Moreover, we discuss the v ≥ 1 case and illustrate our findings with several numerical examples.