Models with time-dependent parameters using transform methods: application to Heston's model
Abstract
This paper presents a methodology to introduce time-dependent parameters for a wide family of models preserving their analytic tractability. This family includes hybrid models with stochastic volatility, stochastic interest-rates, jumps and their non-hybrid counterparts. The methodology is applied to Heston's model. A bootstrapping algorithm is presented for calibration. A case study works out the calibration of the time-dependent parameters to the volatility surface of the Eurostoxx 50 index. The methodology is also applied to the analytic valuation of forward start vanilla options driven by Heston's model. This result is used to explore the forward skew of the case study.
Keywords
Cite
@article{arxiv.0708.2020,
title = {Models with time-dependent parameters using transform methods: application to Heston's model},
author = {A. Elices},
journal= {arXiv preprint arXiv:0708.2020},
year = {2008}
}
Comments
10 pages, 10 figures, 6 tables, error corrected in sections VI and VII, references added in sections I and VI, Submitted to the Journal of Mathematical Finance