The Heston Model with Time-Dependent Correlation Driven by Isospectral Flows

Long Teng
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Long Teng: Chair of Applied Mathematics and Numerical Analysis, Faculty of Mathematics and Natural Sciences, University of Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany

Mathematics, 2021, vol. 9, issue 9, 1-8

Abstract: In this work, we extend the Heston stochastic volatility model by including a time-dependent correlation that is driven by isospectral flows instead of a constant correlation, being motivated by the fact that the correlation between, e.g., financial products and financial institutions is hardly a fixed constant. We apply different numerical methods, including the method for backward stochastic differential equations (BSDEs) for a fast computation of the extended Heston model. An example of calibration to market data illustrates that our extended Heston model can provide a better volatility smile than the Heston model with other considered extensions.

Keywords: correlation flow; isospectral flow; the Heston stochastic volatility; backward stochastic differential equation; time-dependent correlation (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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