Combined multiplicative–Heston model for stochastic volatility

2021 ◽  
Vol 561 ◽  
pp. 125263
Author(s):  
M. Dashti Moghaddam ◽  
R.A. Serota
Keyword(s):  
Stochastic Volatility ◽  
Heston Model

scholarly journals VARIANCE AND VOLATILITY SWAPS UNDER A TWO-FACTOR STOCHASTIC VOLATILITY MODEL WITH REGIME SWITCHING

2019 ◽  
Vol 22 (04) ◽  
pp. 1950009
Author(s):  
XIN-JIANG HE ◽  
SONG-PING ZHU
Keyword(s):  
Markov Chain ◽  
Characteristic Function ◽  
Stochastic Volatility ◽  
Regime Switching ◽  
Numerical Experiments ◽  
Stochastic Volatility Model ◽  
Heston Model ◽  
Volatility Model ◽  
Significant Difference ◽  
Cir Process

In this paper, the pricing problem of variance and volatility swaps is discussed under a two-factor stochastic volatility model. This model can be treated as a two-factor Heston model with one factor following the CIR process and another characterized by a Markov chain, with the motivation originating from the popularity of the Heston model and the strong evidence of the existence of regime switching in real markets. Based on the derived forward characteristic function of the underlying price, analytical pricing formulae for variance and volatility swaps are presented, and numerical experiments are also conducted to compare swap prices calculated through our formulae and those obtained under the Heston model to show whether the introduction of the regime switching factor would lead to any significant difference.

A NOVEL ANALYTICAL APPROACH FOR PRICING DISCRETELY SAMPLED GAMMA SWAPS IN THE HESTON MODEL

2016 ◽  
Vol 57 (3) ◽  
pp. 244-268
Author(s):  
SANAE RUJIVAN
Keyword(s):  
Closed Form ◽  
Stochastic Volatility ◽  
Analytical Approach ◽  
Solution Procedure ◽  
Stochastic Volatility Model ◽  
Heston Model ◽  
Variance Swaps ◽  
Closed Form Solutions ◽  
Volatility Model ◽  
Closed Form Formula

The main purpose of this paper is to present a novel analytical approach for pricing discretely sampled gamma swaps, defined in terms of weighted variance swaps of the underlying asset, based on Heston’s two-factor stochastic volatility model. The closed-form formula obtained in this paper is in a much simpler form than those proposed in the literature, which substantially reduces the computational burden and can be implemented efficiently. The solution procedure presented in this paper can be adopted to derive closed-form solutions for pricing various types of weighted variance swaps, such as self-quantoed variance and entropy swaps. Most interestingly, we discuss the validity of the current solutions in the parameter space, and provide market practitioners with some remarks for trading these types of weighted variance swaps.

scholarly journals PRICING HOLDER-EXTENDABLE CALL OPTIONS WITH MEAN-REVERTING STOCHASTIC VOLATILITY

2019 ◽  
Vol 61 (4) ◽  
pp. 382-397
Author(s):  
S. N. I. IBRAHIM ◽  
A. DÍAZ-HERNÁNDEZ ◽  
J. G. O’HARA ◽  
N. CONSTANTINOU
Keyword(s):  
Fourier Transform ◽  
Fast Fourier Transform ◽  
Stochastic Volatility ◽  
Fourier Method ◽  
Heston Model ◽  
Computational Time ◽  
Characteristic Functions ◽  
Underlying Asset ◽  
Call Options ◽  
Integral Forms

Options with extendable features have many applications in finance and these provide the motivation for this study. The pricing of extendable options when the underlying asset follows a geometric Brownian motion with constant volatility has appeared in the literature. In this paper, we consider holder-extendable call options when the underlying asset follows a mean-reverting stochastic volatility. The option price is expressed in integral forms which have known closed-form characteristic functions. We price these options using a fast Fourier transform, a finite difference method and Monte Carlo simulation, and we determine the efficiency and accuracy of the Fourier method in pricing holder-extendable call options for Heston parameters calibrated from the subprime crisis. We show that the fast Fourier transform reduces the computational time required to produce a range of holder-extendable call option prices by at least an order of magnitude. Numerical results also demonstrate that when the Heston correlation is negative, the Black–Scholes model under-prices in-the-money and over-prices out-of-the-money holder-extendable call options compared with the Heston model, which is analogous to the behaviour for vanilla calls.

Stochastic volatility and the goodness-of-fit of the Heston model

2005 ◽  
Vol 5 (2) ◽  
pp. 199-211 ◽  
Author(s):  
Gilles Daniel ◽  
Nathan L. Joseph * ◽  
David S. Brée
Keyword(s):  
Stochastic Volatility ◽  
Goodness Of Fit ◽  
Heston Model

scholarly journals Multidimensional Structural Credit Modeling under Stochastic Volatility

2013 ◽  
Vol 2013 ◽  
pp. 1-12
Author(s):  
Marcos Escobar ◽  
Tim Friederich ◽  
Luis Seco ◽  
Rudi Zagst
Keyword(s):  
Financial Crisis ◽  
Stochastic Volatility ◽  
Default Risk ◽  
Heston Model ◽  
Call Option ◽  
Fannie Mae ◽  
Structural Credit Model ◽  
Dependency Structures ◽  
Freddie Mac ◽  
A Company

This paper extends the structural credit model with underlying stochastic volatility to a multidimensional framework. The model combines the Black/Cox framework with the Heston model interpreting the equity of a company as a down-and-out barrier call option on the company's assets. This implies a combination of local and stochastic volatility on the equity as well as other stylized features. In this paper, we allow for a correlation between the asset processes of different companies to incorporate dependency structures. An estimator for the correlation parameter is derived and tested in a recovery framework. With the help of this model, we examine the default risk of the two mortgage lenders Fannie Mae and Freddie Mac before their actual placement into federal conservatorship and show that their default risk severely increased during the financial crisis.

scholarly journals INTEGRAL REPRESENTATION OF PROBABILITY DENSITY OF STOCHASTIC VOLATILITY MODELS AND TIMER OPTIONS

2017 ◽  
Vol 20 (08) ◽  
pp. 1750055 ◽  
Author(s):  
ZHENYU CUI ◽  
J. LARS KIRKBY ◽  
GUANGHUA LIAN ◽  
DUY NGUYEN
Keyword(s):  
Stochastic Volatility ◽  
Probabilistic Method ◽  
Stochastic Volatility Model ◽  
Heston Model ◽  
Model Parameters ◽  
Stochastic Volatility Models ◽  
Volatility Models ◽  
Volatility Model ◽  
Probability Densities ◽  
Special Case

This paper contributes a generic probabilistic method to derive explicit exact probability densities for stochastic volatility models. Our method is based on a novel application of the exponential measure change in [Z. Palmowski & T. Rolski (2002) A technique for exponential change of measure for Markov processes, Bernoulli 8(6), 767–785]. With this generic approach, we first derive explicit probability densities in terms of model parameters for several stochastic volatility models with nonzero correlations, namely the Heston 1993, [Formula: see text], and a special case of the [Formula: see text]-Hypergeometric stochastic volatility models recently proposed by [J. Da Fonseca & C. Martini (2016) The [Formula: see text]-Hypergeometric stochastic volatility model, Stochastic Processes and their Applications 126(5), 1472–1502]. Then, we combine our method with a stochastic time change technique to develop explicit formulae for prices of timer options in the Heston model, the [Formula: see text] model and a special case of the [Formula: see text]-Hypergeometric model.

ON PRICING CONTINGENT CLAIMS UNDER THE DOUBLE HESTON MODEL

2012 ◽  
Vol 15 (05) ◽  
pp. 1250033 ◽  
Author(s):  
M. COSTABILE ◽  
I. MASSABÒ ◽  
E. RUSSO
Keyword(s):  
Stochastic Volatility ◽  
Numerical Experiments ◽  
Contingent Claims ◽  
Stochastic Volatility Model ◽  
Heston Model ◽  
Underlying Asset ◽  
State Variable ◽  
Proposed Model ◽  
Volatility Model ◽  
Asset Value

This article presents a lattice based approach for pricing contingent claims when the underlying asset evolves according to the double Heston (dH) stochastic volatility model introduced by Christoffersen et al. (2009). We discretize the continuous evolution of both squared volatilities by a "binomial pyramid", and consider the asset value as an auxiliary state variable for which a subset of possible realizations is attached to each node of the pyramid. The elements of the subset cover the range of asset prices at each time slice, and claim price is computed solving backward through the "binomial pyramid". Numerical experiments confirm the accuracy and efficiency of the proposed model.

COMPUTATION OF VOLATILITY IN STOCHASTIC VOLATILITY MODELS WITH HIGH FREQUENCY DATA

2010 ◽  
Vol 13 (05) ◽  
pp. 767-787 ◽  
Author(s):  
EMILIO BARUCCI ◽  
MARIA ELVIRA MANCINO
Keyword(s):  
Stochastic Volatility ◽  
High Frequency ◽  
Asset Price ◽  
Heston Model ◽  
High Frequency Data ◽  
Monte Carlo Experiment ◽  
Price Model ◽  
Stochastic Volatility Models ◽  
Volatility Models ◽  
Correlation Parameters

We consider general stochastic volatility models driven by continuous Brownian semimartingales, we show that the volatility of the variance and the leverage component (covariance between the asset price and the variance) can be reconstructed pathwise by exploiting Fourier analysis from the observation of the asset price. Specifying parametrically the asset price model we show that the method allows us to compute the parameters of the model. We provide a Monte Carlo experiment to recover the volatility and correlation parameters of the Heston model.

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