The Lifted Heston Stochastic Volatility Model
Master Thesis
2020
Permanent link to this Item
Authors
Journal Title
Link to Journal
Journal ISSN
Volume Title
Publisher
Publisher
Faculty
License
Series
Abstract
Can we capture the explosive nature of volatility skew observed in the market, without resorting to non-Markovian models? We show that, in terms of skew, the Heston model cannot match the market at both long and short maturities simultaneously. We introduce Abi Jaber (2019)'s Lifted Heston model and explain how to price options with it using both the cosine method and standard Monte-Carlo techniques. This allows us to back out implied volatilities and compute skew for both models, confirming that the Lifted Heston nests the standard Heston model. We then produce and analyze the skew for Lifted Heston models with a varying number N of mean reverting terms, and give an empirical study into the time complexity of increasing N. We observe a weak increase in convergence speed in the cosine method for increased N, and comment on the number of factors to implement for practical use.
Description
Keywords
Reference:
Broodryk, R. 2020. The Lifted Heston Stochastic Volatility Model. . ,Faculty of Commerce ,African Institute of Financial Markets and Risk Management. http://hdl.handle.net/11427/32614