FX smile in the Heston model

Agnieszka Janek, Tino Kluge, Rafał Weron and Uwe Wystup
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Agnieszka Janek: Wrocław University of Technology, Institute of Mathematics and Computer Science
Tino Kluge: MathFinance AG
Uwe Wystup: MathFinance AG

Chapter 4 in Statistical Tools for Finance and Insurance, 2011, pp 133-162 from Springer

Abstract: Abstract The universal benchmark for option pricing is flawed. The Black-Scholes formula is based on the assumption of a geometric Brownian motion (GBM) dynamics with constant volatility. Yet, the model-implied volatilities for different strikes and maturities of options are not constant and tend to be smile shaped (or in some markets skewed). Over the last three decades researchers have tried to find extensions of the model in order to explain this empirical fact.

Keywords: Option Price; Stochastic Volatility; Implied Volatility; Geometric Brownian Motion; Stochastic Volatility Model (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: FX Smile in the Heston Model (2010)
Working Paper: FX Smile in the Heston Model (2010)
Working Paper: FX Smile in the Heston Model (2010)
Working Paper: FX smile in the Heston model (2010)
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DOI: 10.1007/978-3-642-18062-0_4

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