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A Multifactor Volatility Heston Model
[journal article]
Abstract We consider a model for a single risky asset whose volatility follows a multifactor (matrix)Wishart affine process, recently introduced in finance by Gourieroux and Sufana (2004). As in standard Duffie and Kan (1996) affine models the pricing problem can be solved through the Fast Fourier
Transform ... view more
We consider a model for a single risky asset whose volatility follows a multifactor (matrix)Wishart affine process, recently introduced in finance by Gourieroux and Sufana (2004). As in standard Duffie and Kan (1996) affine models the pricing problem can be solved through the Fast Fourier
Transform of Carr and Madan (1999). A numerical illustration shows that this specification provides a separate fit of the long term and short term implied volatility surface and, differently from previous diffusive stochastic volatility models, it is possible to identify a specific factor accounting for a stochastic leverage effect, a well known stylized fact of FX option markets
analyzed in Carr and Wu (2004).... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Basic Research, General Concepts and History of Economics
Method
theory application
Free Keywords
Stochastic volatility; Financial derivatives; Volatility modelling; Options pricing; Options volatility
Document language
English
Publication Year
2008
Page/Pages
p. 591-604
Journal
Quantitative Finance, 8 (2008) 6
DOI
https://doi.org/10.1080/14697680701668418
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)