# Questions tagged [stochastic-volatility]

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### How to show that this weak scheme is a cubature scheme?

Weak schemes, such as Ninomiya-Victoir or Ninomiya-Ninomiya, are typically used for discretization of stochastic volatility models such as the Heston Model. Can anyone familiar with Cubature on ...
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### Transformation of Volatility - BS

I have recently seen a paper about the Boeing approach that replaces the "normal" Stdev in the BS formula with the Stdev \sigma'=\sqrt{\frac{ln(1+\frac{\sigma}{\mu})^{2}}{t}} \end{...
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### Jim Gatheral's ansatz

In the Ansatz section of Jim Gatheral's book Volatility Surface (page 32), he assumes $$\mathbb E[x_s|x_T]=x_T\frac{\hat w_s}{\hat w_T}$$ where $\hat w_t:=\int_0^t \hat v_s ds$ is the expected total ...
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### Solve the following SDE: $\mathrm{d}X_t = a(b-X_t) \,\mathrm{d}t + c X_t \, \mathrm{d}W_t$

Let $\mathrm{d}X_t = a(b-X_t) \,\mathrm{d}t + c X_t \, \mathrm{d}W_t$ be a stochastic differential equation where $a$, $b$, and $c$ are positive constants, so I tried to solve it but I got stuck in ...
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### Can the Heston model be shown to reduce to the original Black Scholes model if appropriate parameters are chosen?

Summary For Heston model parameters that render the variance process constant, the solution should revert to plain Black-Scholes. Closed from solutions to the Heston model don't seem to do this, even ...
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### Why is there a stong intraday-correlation between spot and vol?

Fig.1 shows an intraday scatterplot of the DAX future against its volatility index VDAX on 6-Jan-2016. The data suggest a strong negative correlation between the two. There are various models ...
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### Vega of exotic options

I'am wondering if there is a standard definition to the Vega of an exotic product when the underlying model is not Black-Scholes. Let me give some examples : What is the Vega if the price is ...
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### How can I compare 30 day implied volatility forecasts with GARCH forecasts?

I'm trying to understand whether there is a good way to compare forecasts for volatility from different sources i.e., implied volatility and GARCH. I'll outline a few statements that I believe and if ...
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### Estimate rolling stochastic volatility forecast using stochvol in R

I want to use the R package stochvol to fit a SV model to a DAX training set and use the output to estimate a rolling one-step-ahead forecast: ...
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### Are there "live" uses of the Generalized Method of Moments or are they all academic?

I see the Generalized Method of Moments suggested in numerous academic papers as a way to calibrate stochastic volatility models. However, any decent trading shop is going to calibrate to observable ...
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### Why do we fit volatility surfaces implied from a option pricing model to the empirical data?

As far as I understand volatility surface. It is made of 2 components, the volatility skew/smile and the volatility term structure. Together they form something like Implied volatility is ...
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### What tradeoff is there to using an accurate estimate with a large confidence interval?

I am working on calibrating a Heston model from simulated historical stock data. After obtaining an accurate estimate of the model parameters I found very large 95% confidence intervals for these ...
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### SABR calibration: simple explanation and implementation

I would like to learn more about the SABR model and ho it is used in modeling smiles in equity, FX and rates markets. How would you explain the process and its implementation in simple steps? Any web ...
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### Calculating 6-minute, 20-minute, 45-minute, and 3-hour volatility

I am looking to measure the volatility from the open of the market until a trade takes place and use that volatility in post-trade regressions to help explain transaction costs. A simple regression ...
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### on "recovering probability distributions from option prices" - how to subtract influence of stochastic volatility?

This is based on a 1995 paper by Rubinstein/Jackwerth by the above title where the authors produces a distribution of stock prices inferred from option prices. But their approach only produces a joint ...
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Reading Gatheral's The volatility surface, page 7. The model they are talking about is \begin{align}dS_t&=\mu_tS_tdt+\sqrt{\nu_t}S_tdZ_1\\d\nu_t&=\alpha(S_t,\nu_t,t)dt+\eta\beta(S_t,\nu_t,...
I'm trying to calculate the hedging quantities of the Heston model. I undestand that the replicating portfolio consist of one option, $V = V(S,v,t)$, $\Delta$ stocks and $\phi$ units of the option to ...