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Lifting the Heston model

Eduardo Abi Jaber
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Eduardo Abi Jaber: CEREMADE

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Abstract: How to reconcile the classical Heston model with its rough counterpart? We introduce a lifted version of the Heston model with n multi-factors, sharing the same Brownian motion but mean reverting at different speeds. Our model nests as extreme cases the classical Heston model (when n = 1), and the rough Heston model (when n goes to infinity). We show that the lifted model enjoys the best of both worlds: Markovianity and satisfactory fits of implied volatility smiles for short maturities with very few parameters. Further, our approach speeds up the calibration time and opens the door to time-efficient simulation schemes.

New Economics Papers: this item is included in nep-cmp
Date: 2018-10
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Handle: RePEc:arx:papers:1810.04868