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.