A multifactor volatility Heston model

José Da Fonseca, Martino Grasselli and Claudio Tebaldi ()

Quantitative Finance, 2008, vol. 8, issue 6, 591-604

Abstract: We model the volatility of a single risky asset using a multifactor (matrix) Wishart affine process, recently introduced in finance by Gourieroux and Sufana. As in standard Duffie and Kan affine models the pricing problem can be solved through the Fast Fourier Transform of Carr and Madan. A numerical illustration shows that this specification provides a separate fit of the long-term and short-term implied volatility surface and, differently from previous diffusive stochastic volatility models, it is possible to identify a specific factor accounting for the stochastic leverage effect, a well-known stylized fact of the FX option markets analysed by Carr and Wu.

Keywords: Stochastic volatility; Financial derivatives; Volatility modelling; Options pricing; Options volatility (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (74)

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DOI: 10.1080/14697680701668418

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