eprintid: 1552816
rev_number: 36
eprint_status: archive
userid: 608
dir: disk0/01/55/28/16
datestamp: 2017-04-22 21:57:19
lastmod: 2021-10-16 22:08:25
status_changed: 2017-08-15 10:50:50
type: article
metadata_visibility: show
creators_name: Cui, Y
creators_name: del Baño Rollin, S
creators_name: Germano, G
title: Full and fast calibration of the Heston stochastic volatility model
ispublished: pub
divisions: UCL
divisions: B04
divisions: C05
divisions: F48
keywords: Pricing, Heston model, Model calibration, Optimisation, Levenberg–Marquardt method
note: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
abstract: This paper presents an algorithm for a complete and efficient calibration of the Heston stochastic volatility model. We express the calibration as a nonlinear least-squares problem. We exploit a suitable representation of the Heston characteristic function and modify it to avoid discontinuities caused by branch switchings of complex functions. Using this representation, we obtain the analytical gradient of the price of a vanilla option with respect to the model parameters, which is the key element of all variants of the objective function. The interdependence between the components of the gradient enables an efficient implementation which is around ten times faster than with a numerical gradient. We choose the Levenberg–Marquardt method to calibrate the model and do not observe multiple local minima reported in previous research. Two-dimensional sections show that the objective function is shaped as a narrow valley with a flat bottom. Our method is the fastest calibration of the Heston model developed so far and meets the speed requirement of practical trading.
date: 2017-05-17
date_type: published
official_url: http://doi.org/10.1016/j.ejor.2017.05.018
oa_status: green
full_text_type: other
language: eng
primo: open
primo_central: open_green
article_type_text: Journal Article
verified: verified_manual
elements_id: 1280000
doi: 10.1016/j.ejor.2017.05.018
lyricists_name: Germano, Guido
lyricists_id: GGERM33
actors_name: Germano, Guido
actors_name: Stacey, Thomas
actors_id: GGERM33
actors_id: TSSTA20
actors_role: owner
actors_role: impersonator
full_text_status: public
publication: European Journal of Operational Research
volume: 263
number: 2
pagerange: 625-638
issn: 0377-2217
citation:        Cui, Y;    del Baño Rollin, S;    Germano, G;      (2017)    Full and fast calibration of the Heston stochastic volatility model.                   European Journal of Operational Research , 263  (2)   pp. 625-638.    10.1016/j.ejor.2017.05.018 <https://doi.org/10.1016/j.ejor.2017.05.018>.       Green open access   
 
document_url: https://discovery.ucl.ac.uk/id/eprint/1552816/1/Germano_full%20and%20fast%20calibration_Heston_EurJOperRes_263_625_2017_accepted.pdf
document_url: https://discovery.ucl.ac.uk/id/eprint/1552816/6/Germano_full%20and%20fast%20calibration_Heston_EurJOperRes_263_625_2017_suppl.zip