libquantlib0-dev 1.7.1-1 / usr / include / ql / pricingengines / vanilla / analytichestonengine.hpp

/* -*- mode: c++; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*- */

/*
 Copyright (C) 2004, 2005, 2008 Klaus Spanderen
 Copyright (C) 2007 StatPro Italia srl

 This file is part of QuantLib, a free-software/open-source library
 for financial quantitative analysts and developers - http://quantlib.org/

 QuantLib is free software: you can redistribute it and/or modify it
 under the terms of the QuantLib license.  You should have received a
 copy of the license along with this program; if not, please email
 <quantlib-dev@lists.sf.net>. The license is also available online at
 <http://quantlib.org/license.shtml>.

 This program is distributed in the hope that it will be useful, but WITHOUT
 ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS
 FOR A PARTICULAR PURPOSE.  See the license for more details.
*/

/*! \file analytichestonengine.hpp
    \brief analytic Heston-model engine
*/

#ifndef quantlib_analytic_heston_engine_hpp
#define quantlib_analytic_heston_engine_hpp

#include <ql/math/integrals/integral.hpp>
#include <ql/math/integrals/gaussianquadratures.hpp>
#include <ql/pricingengines/genericmodelengine.hpp>
#include <ql/models/equity/hestonmodel.hpp>
#include <ql/instruments/vanillaoption.hpp>

#include <boost/function.hpp>
#include <complex>

namespace QuantLib {

    //! analytic Heston-model engine based on Fourier transform

    /*! Integration detail:
        Two algebraically equivalent formulations of the complex
        logarithm of the Heston model exist. Gatherals [2005]
        (also Duffie, Pan and Singleton [2000], and Schoutens,
        Simons and Tistaert[2004]) version does not cause
        discoutinuities whereas the original version (e.g. Heston [1993])
        needs some sort of "branch correction" to work properly.
        Gatheral's version does also work with adaptive integration
        routines and should be preferred over the original Heston version.
    */

    /*! References:

        Heston, Steven L., 1993. A Closed-Form Solution for Options
        with Stochastic Volatility with Applications to Bond and
        Currency Options.  The review of Financial Studies, Volume 6,
        Issue 2, 327-343.

        A. Sepp, Pricing European-Style Options under Jump Diffusion
        Processes with Stochastic Volatility: Applications of Fourier
        Transform (<http://math.ut.ee/~spartak/papers/stochjumpvols.pdf>)

        R. Lord and C. Kahl, Why the rotation count algorithm works,
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921335

        H. Albrecher, P. Mayer, W.Schoutens and J. Tistaert,
        The Little Heston Trap, http://www.schoutens.be/HestonTrap.pdf

        J. Gatheral, The Volatility Surface: A Practitioner's Guide,
        Wiley Finance

        \ingroup vanillaengines

        \test the correctness of the returned value is tested by
              reproducing results available in web/literature
              and comparison with Black pricing.
    */
    class AnalyticHestonEngine
        : public GenericModelEngine<HestonModel,
                                    VanillaOption::arguments,
                                    VanillaOption::results> {
      public:
        class Integration;
        enum ComplexLogFormula { Gatheral, BranchCorrection };

        // Simple to use constructor: Using adaptive
        // Gauss-Lobatto integration and Gatheral's version of complex log.
        // Be aware: using a too large number for maxEvaluations might result
        // in a stack overflow as the Lobatto integration is a recursive
        // algorithm.
        AnalyticHestonEngine(const boost::shared_ptr<HestonModel>& model,
                             Real relTolerance, Size maxEvaluations);

        // Constructor using Laguerre integration
        // and Gatheral's version of complex log.
        AnalyticHestonEngine(const boost::shared_ptr<HestonModel>& model,
                             Size integrationOrder = 144);

        // Constructor giving full control
        // over the Fourier integration algorithm
        AnalyticHestonEngine(const boost::shared_ptr<HestonModel>& model,
                             ComplexLogFormula cpxLog, const Integration& itg);


        void calculate() const;
        Size numberOfEvaluations() const;

        static void doCalculation(Real riskFreeDiscount,
                                             Real dividendDiscount,
                                             Real spotPrice,
                                             Real strikePrice,
                                             Real term,
                                             Real kappa, Real theta, Real sigma, Real v0, Real rho,
                                             const TypePayoff& type,
                                             const Integration& integration,
                                             const ComplexLogFormula cpxLog,
                                             const AnalyticHestonEngine* const enginePtr,
                                             Real& value,
                                             Size& evaluations);

      protected:
        // call back for extended stochastic volatility
        // plus jump diffusion engines like bates model
        virtual std::complex<Real> addOnTerm(Real phi,
                                             Time t,
                                             Size j) const;

      private:
        class Fj_Helper;

        mutable Size evaluations_;
        const ComplexLogFormula cpxLog_;
        const boost::shared_ptr<Integration> integration_;
    };


    class AnalyticHestonEngine::Integration {
      public:
        // non adaptive integration algorithms based on Gaussian quadrature
        static Integration gaussLaguerre    (Size integrationOrder = 128);
        static Integration gaussLegendre    (Size integrationOrder = 128);
        static Integration gaussChebyshev   (Size integrationOrder = 128);
        static Integration gaussChebyshev2nd(Size integrationOrder = 128);

        // for an adaptive integration algorithm Gatheral's version has to
        // be used.Be aware: using a too large number for maxEvaluations might
        // result in a stack overflow as the these integrations are based on
        // recursive algorithms.
        static Integration gaussLobatto(Real relTolerance, Real absTolerance,
                                        Size maxEvaluations = 1000);

        // usually these routines have a poor convergence behavior.
        static Integration gaussKronrod(Real absTolerance,
                                        Size maxEvaluations = 1000);
        static Integration simpson(Real absTolerance,
                                   Size maxEvaluations = 1000);
        static Integration trapezoid(Real absTolerance,
                                     Size maxEvaluations = 1000);

        Real calculate(Real c_inf,
                       const boost::function1<Real, Real>& f) const;

        Size numberOfEvaluations() const;
        bool isAdaptiveIntegration() const;

      private:
        enum Algorithm
            { GaussLobatto, GaussKronrod, Simpson, Trapezoid,
              GaussLaguerre, GaussLegendre,
              GaussChebyshev, GaussChebyshev2nd };

        Integration(Algorithm intAlgo,
                    const boost::shared_ptr<GaussianQuadrature>& quadrature);

        Integration(Algorithm intAlgo,
                    const boost::shared_ptr<Integrator>& integrator);

        const Algorithm intAlgo_;
        const boost::shared_ptr<Integrator> integrator_;
        const boost::shared_ptr<GaussianQuadrature> gaussianQuadrature_;
    };

    // inline

    inline 
    std::complex<Real> AnalyticHestonEngine::addOnTerm(Real,
                                                       Time,
                                                       Size) const {
        return std::complex<Real>(0,0);
    }
}

#endif