Title
Heston model : the variance swap calibration Heston model : the variance swap calibration
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
New York, N.Y. ,
Subject
Computer. Automation
Source (journal)
Journal of optimization theory and applications. - New York, N.Y.
Volume/pages
161(2014) :1 , p. 76-89
ISSN
0022-3239
ISI
000334427600004
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Abstract
This paper features a market implied methodology to infer adequate starting values for the spot and long-run variances and for the mean reversion rate of a calibration exercise under the Heston model. More particularly, these initial parameters are obtained by matching the term structure of the future expected total variance, inferred from the volatility surface, with the model term structure. In the numerical study, we compare the goodness of fit and the parameter stability of the Heston model calibrated by using either plausible random or market implied starting values for a one-year sample period including the recent credit crunch. In particular, we show that the proposed methodology avoids getting stuck in one bad local minimum and stabilizes the calibrated parameters through time.
E-info
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