Timeline for How to determine the risk-neutral measure in a Heston model?
Current License: CC BY-SA 4.0
12 events
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| Nov 1, 2019 at 19:02 | history | bumped | CommunityBot | This question has answers that may be good or bad; the system has marked it active so that they can be reviewed. | |
| Jul 4, 2019 at 18:03 | history | bumped | CommunityBot | This question has answers that may be good or bad; the system has marked it active so that they can be reviewed. | |
| Mar 6, 2019 at 21:00 | history | tweeted | twitter.com/StackQuant/status/1103400028134141957 | ||
| Mar 6, 2019 at 18:01 | history | bumped | CommunityBot | This question has answers that may be good or bad; the system has marked it active so that they can be reviewed. | |
| Feb 6, 2019 at 9:24 | comment | added | Vim | @Raskolnikov or, at the cost of more model complexity, we should not assume the stock price drift to be this and that, but instead calibrate it or fit it using available market data? In this case, the risk-neutral drift of the stock price, $\mu_S$, is also part of the parameter configuration. So the parameter space becomes 5 dimensional ($\mu_S, \kappa, \bar v, \sigma, \rho$). | |
| Feb 6, 2019 at 6:22 | comment | added | Vim | @Raskolnikov if my interpretation is correct, in practice, under the Heston model, we still assume the drift of the stock price is $(r-q)dt$ under the risk neutral measure; then what we calibrate are the params of the variance process under the risk neutral measure. But how can we just require the risk neutral price process still has the same drift as in the classical BS model? | |
| Feb 5, 2019 at 15:13 | comment | added | Raskolnikov | If however you only have the price of the asset, then several risk-neutral measures are compatible with it. Then, you can select one based on extra conditions you impose for theoretical reasons. | |
| Feb 5, 2019 at 15:13 | comment | added | Raskolnikov | I have no experience with that particular method. The method I used was basically calibrating with vanilla options. Technically, you only need two financial instruments, the underlying asset and an option on the underlying or the underlying and a vol swap. But in practice, since markets are imperfect, people tend to use the complete vanilla option surface (cleaned up for outliers and such). Calibrating in that case amounts to a closest fit (through least squares for instance) to the vanilla option prices. | |
| Feb 5, 2019 at 14:37 | comment | added | Vim | @Raskolnikov thanks. So it says the main idea is to use the var/vol swap to "calibrate" the risk-neutral measure. Would you care to provide any more concrete exposition on this method? | |
| Feb 5, 2019 at 11:24 | comment | added | Raskolnikov | The wiki page on the Heston model answers your question pretty well. | |
| Feb 4, 2019 at 17:44 | answer | added | user34971 | timeline score: 3 | |
| Feb 4, 2019 at 16:59 | history | asked | Vim | CC BY-SA 4.0 |