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Oct 20

Heston model pricing and calibration

Posted by abiao at 19:37 | Code » Matlab | Comments(8) | Reads(17545)

The Heston Model is one of the most widely used stochastic volatility (SV) models today. Its attractiveness lies in the powerful duality of its tractability and robustness relative to other SV models.

This project initially begun as one that addressed the calibration problem of this model. Attempting to solve such a problem was an impossible task due to the lack of exposure to such ‘advanced’ models.

I, therefore, decided to take a slight digression into the world of Heston and stochastic volatility. Enroute I realised that fundamental information that one would require to gain an intuitive understanding of such a model was very disjoint and hence incomplete. This project, therefore, evolved into something that could fill this gap.

A practical approach has been adopted since the focus of calibration is quite practical itself. All the relevant tools are provided to facilitate this calibration process, including MATLAB code. This code has been confined to the appendix to keep the main body clutter free and ‘quick-to-read’.

paper and code can be downloaded at http://math.nyu.edu/~atm262/fall06/compmethods/a1/nimalinmoodley.pdf

Great work. Could you please check on page 13 the equation for B(Phi)? I have the impression that there is a missing sigma^2 dividing the zeta function in the numerator. The Hong presentation includes that. If my calculations are not mistaken, when we manipulate the Heston 93 version of the characteristic function to this of yours and Hong to be used as Carr's paper, we arrive at Hong's.
this paper was not written by me, i just found & share it, but you r right, there are some errors in this paper.
Hi , I am trying to price options using local volatility model ( dupire style/ gatheral). any chance you have material on this projects? thkx vm
Jon, take a look at this page http://www.performancetrading.it/Documents/KsIntroduction/KsI_Index.htm, where you can find matlab files and basic introductory material.
thanks abiao, that looks not bad. cheers

I am trying to access the link for the zip file but unfortunately an error message comes up. Is there any other way I can download it.

Thanks in advance!!!
I've updated the link.
Thanks abiao!
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