Parameter estimation of a bivariate diffusion process : the Heston model

Nomoyi, Siyabulela

Parameter estimation of a bivariate diffusion process : the Heston model

Master Thesis

2011

Publisher

University of Cape Town

Department

Department of Statistical Sciences

Faculty

Faculty of Science

Abstract

The main objective of the research is to estimate the parameters on the Heston (1993) model, which models the movement of asset prices assuming that the asset price volatility is stochastic. The paper concentrates on estimating these parameters by approximating the transitional probabilities of the diffusion process with a saddlepoint distribution. By solving a system of ordinary differential equations that are in terms of the system’s cumulants, and using these solutions to calculate the saddlepoint, the transitional probabilities of the diffusion process can be approximated.

Description

Includes abstract.

Includes bibliographical references (leaves 27-29).

Keywords

Mathematics of Finance

Reference:

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