 Stochastic volatility and the goodness-of-fit of the Heston modelGilles Daniel, Nathan Joseph and David Bree Quantitative Finance, 2005, vol. 5, issue 2, 199-211 Abstract: Recently, Drăgulescu and Yakovenko proposed an analytical formula for computing the probability density function of stock log returns, based on the Heston model, which they tested empirically. Their research design inadvertently favourably biased the fit of the data to the Heston model, thus overstating their empirical results. Furthermore, Drăgulescu and Yakovenko did not perform any goodness-of-fit statistical tests. This study employs a research design that facilitates statistical tests of the goodness-of-fit of the Heston model to empirical returns. Robustness checks are also performed. In brief, the Heston model outperformed the Gaussian model only at high frequencies and even so does not provide a statistically acceptable fit to the data. The Gaussian model performed (marginally) better at medium and low frequencies, at which points the extra parameters of the Heston model have adverse impacts on the test statistics. Date: 2005 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:5:y:2005:i:2:p:199-211 Ordering information: This journal article can be ordered from DOI: 10.1080/14697680500148521 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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