Extension of Stochastic Volatility Equity Models with Hull-White Interest Rate Process

We present an extension of stochastic volatility equity models by a stochastic Hull-White interest rate component while assuming non-zero correlations between the underlying processes. We place these systems of stochastic differential equations in the class of affine jump diffusion linear quadratic jump-diffusion processes (Duffie, Pan and Singleton [13], Cheng and Scaillet [10]) so that the pricing of European products can be efficiently done within the Fourier cosine expansion pricing framework [14]. We compare the new stochastic volatility Schöbel-Zhu-Hull-White hybrid model with a Heston-Hull-White model [3; 19], and also apply the models to price some hybrid structured derivatives that combine the equity and interest rate asset classes.