Monte Carlo Simulation of a Two-Factor Stochastic Volatility Model

Empirical phenomenon in financial markets such as volatility smiles and term structure of implied volatilities made stochastic volatility models more attractive. In this paper we consider a multi factor stochastic volatility model with two mean reverting factors and the analytical approximation formula given by Fouque et al. [5] for a vanilla European call. Using the European call option pricng problem as our test problem we compared crude MC estimator with the randomized quasi-Monte Carlo method. Our findings show that using the randomized low discrepancy sequences such as Faure sequence, one can reduce the variance of the estimator and achieve faster convergence compared to crude Monte Carlo simulation.