A parsimonious multi-asset Heston model: calibration and derivative pricing

  • We present a parsimonious multi-asset Heston model. All single-asset submodels follow the well-known Heston dynamics and their parameters are typically calibrated on implied market volatilities. We focus on the calibration of the correlation structure between the single-asset marginals in the absence of sucient liquid cross-asset option price data. The presented model is parsimonious in the sense that d(d􀀀1)=2 asset-asset cross-correlations are required for a d-asset Heston model. In order to calibrate the model, we present two general setups corresponding to relevant practical situations: (1) when the empirical cross-asset correlations in the risk neutral world are given by the user and we need to calibrate the correlations between the driving Brownian motions or (2) when they have to be estimated from the historical time series. The theoretical background, including the ergodicity of the multidimensional CIR process, for the proposed estimators is also studied.

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Author:A. Szimayer, G. Dimitroff, S. Lorenz
Serie (Series number):Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (171)
Document Type:Report
Language of publication:English
Year of Completion:2009
Year of Publication:2009
Publishing Institute:Fraunhofer-Institut für Techno- und Wirtschaftsmathematik
Date of the Publication (Server):2009/12/08
GND-Keyword:Heston model; multi-asset; option pricing; calibration; correlation
Faculties / Organisational entities:Fraunhofer (ITWM)
DDC-Cassification:5 Naturwissenschaften und Mathematik / 510 Mathematik
Licence (German):Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011