A multivariate stochastic volatility model with applications in the foreign exchange market
Marcos Escobar Anel () and
Christoph Gschnaidtner ()
Additional contact information
Christoph Gschnaidtner: Technische Universität München
Review of Derivatives Research, 2018, vol. 21, issue 1, No 1, 43 pages
Abstract The main objective of this paper is to study the behavior of a daily calibration of a multivariate stochastic volatility model, namely the principal component stochastic volatility (PCSV) model, to market data of plain vanilla options on foreign exchange rates. To this end, a general setting describing a foreign exchange market is introduced. Two adequate models—PCSV and a simpler multivariate Heston model—are adjusted to suit the foreign exchange setting. For both models, characteristic functions are found which allow for an almost instantaneous calculation of option prices using Fourier techniques. After presenting the general calibration procedure, both the multivariate Heston and the PCSV models are calibrated to a time series of option data on three exchange rates—USD-SEK, EUR-SEK, and EUR-USD—spanning more than 11 years. Finally, the benefits of the PCSV model which we find to be superior to the multivariate extension of the Heston model in replicating the dynamics of these options are highlighted.
Keywords: Stochastic volatility models; Multivariate models; PCSV model; FX options; Calibration; Triangular relation (search for similar items in EconPapers)
JEL-codes: F31 G13 G15 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11147-017-9132-8 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:21:y:2018:i:1:d:10.1007_s11147-017-9132-8
Ordering information: This journal article can be ordered from
http://www.springer. ... 29/journal/11147/PS2
Access Statistics for this article
Review of Derivatives Research is currently edited by Gurdip Bakshi and Dilip Madan
More articles in Review of Derivatives Research from Springer
Bibliographic data for series maintained by Sonal Shukla ().