Tag Info

Hot answers tagged

4

The Heston model is represented by the bivariate system of stochastic differential equations (SDE) \begin{align} & d{{S}_{t}}=rS_tdt+{\sqrt\upsilon_t} d{{W}_{1}}(t) \\ & d{{\upsilon}_{t}}=\kappa(\theta-\upsilon_t) dt+\sigma{\sqrt\upsilon_t}d{{W}_{2}}(t) \\ \end{align} The most popular way to estimate the parameters of the Heston model is with loss ...


4

I know two papers explaining how to calibrate this kind of models, and one of them explain the impact of the quality of the fit on a pricing model: Aït-Sahalia, Y. (2002, January). Maximum likelihood estimation of discretely sampled diffusions: A closed-form approximation approach. Econometrica 70 (1), 223-262. Azencott, R., Y. Gadhyan, and R. Glowinski ...


1

This is related to a common misconception called the Time Diversification fallacy. Returns do not average out over longer periods of time. On the contrary, as emcor points out, the variance increases. You might find this article named Risk and Time by John Norstad interesting.


1

You generated only one realization of the GBM. The variance of a GBM increases with time and so you must generate more realizations to get accurate estimates. Here see a sample of Brownian simluations: http://tex.stackexchange.com/questions/59926/how-to-draw-brownian-motions-in-tikz-pgf



Only top voted, non community-wiki answers of a minimum length are eligible