Tag Info

New answers tagged

0

The typical approach is: you only use option data from the last day. Furthermore, you only include those points that are liquid enough. One approach to this is to weigh the modelling error of an option by its bid-ask spread and vega. Using data from multiple days is not a good approach, because you might have options with the same strike but different ...


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 ...


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


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 ...



Top 50 recent answers are included