DELFT UNIVERSITY OF TECHNOLOGY REPORT 08-04 Extension of Stochastic Volatility Models with Hull-White Interest Rate Process

In recent years the financial world has focused on accurate pricing of exotic and hybrid products that are based on a combination of underlyings from different asset classes. In this paper we present an extension of the stochastic volatility models by a stochastic Hull-White interest rate component. It is our goal to include this system of stochastic differential equations in the class of affine jump diffusion linear quadratic jump-diffusion processes (Duffie, Pan and Singleton [11], Cheng and Scaillet [8]) so that the pricing of European products can be efficiently done within the pricing framework of Carr-Madan [7].