Analytical formula for conditional moments of extended heston-CEV hybrid model with time-dependent parameters

Abstract

This thesis proposes an analytical formula for the conditional moments of the extended Heston-CEV hybrid model, which is the combination of the Heston model and the March-Rosenfeld process, also known as the constant elasticity of variance (CEV) process, to model the price dynamics of the underlying asset. The formula is derived by solving a partial differential equation (PDE) that characterizes a two-dimensional process. This Monte Carlo simulation results to ensure its accuracy. Department formula is practical and more comprehensive than the existing results in the literature. The thesis also includes numerical validations by verifying the analytical formula against