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Smiles all around: FX joint calibration in a multi-Heston model

Alvise De Col, Alessandro Gnoatto and Martino Grasselli

Journal of Banking & Finance, 2013, vol. 37, issue 10, 3799-3818

Abstract: We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.

Keywords: Forex; Calibration; Multi-Heston model; Triangular relation (search for similar items in EconPapers)
JEL-codes: F31 G13 G15 (search for similar items in EconPapers)
Date: 2013
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