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A multifactor volatility Heston model

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  • JosE Da Fonseca
  • Martino Grasselli
  • Claudio Tebaldi

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.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 8 (2008)
Issue (Month): 6 ()
Pages: 591-604

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Handle: RePEc:taf:quantf:v:8:y:2008:i:6:p:591-604

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Related research

Keywords: Stochastic volatility; Financial derivatives; Volatility modelling; Options pricing; Options volatility;

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