SWIFT Calibration of the Heston Model

Eudald Romo and Luis Ortiz-Gracia
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Eudald Romo: Trading Department, Xanadu Trading Limited, 08011 Barcelona, Spain
Luis Ortiz-Gracia: Department of Econometrics, Statistics and Applied Economics, University of Barcelona, 08034 Barcelona, Spain

Mathematics, 2021, vol. 9, issue 5, 1-20

Abstract: In the present work, the SWIFT method for pricing European options is extended to Heston model calibration. The computation of the option price gradient is simplified thanks to the knowledge of the characteristic function in closed form. The proposed calibration machinery appears to be extremely fast, in particular for a single expiry and multiple strikes, outperforming the state-of-the-art method we compare it with. Further, the a priori knowledge of SWIFT parameters makes a reliable and practical implementation of the presented calibration method possible. A wide range of stress, speed and convergence numerical experiments is carried out, with deep in-the-money, at-the-money and deep out-of-the-money options for very short and very long maturities.

Keywords: Heston model; calibration; European options; Shannon wavelets (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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