Smiles All Around: FX Joint Calibration in a Multi-Heston Model

34 Pages Posted: 9 Jan 2012 Last revised: 10 Apr 2014

See all articles by Alvise De Col

Alvise De Col

Independent

Alessandro Gnoatto

University of Verona - Department of Economics

Martino Grasselli

University of Padova - Department of Mathematics; Léonard de Vinci Pôle Universitaire, Research Center

Date Written: June 3, 2013

Abstract

We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.

Keywords: Forex, Calibration, Multi-Heston model, triangular relation

JEL Classification: C52, G12, G13

Suggested Citation

De Col, Alvise and Gnoatto, Alessandro and Grasselli, Martino, Smiles All Around: FX Joint Calibration in a Multi-Heston Model (June 3, 2013). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1982092 or http://dx.doi.org/10.2139/ssrn.1982092

Alvise De Col

Independent ( email )

No Address Available

Alessandro Gnoatto

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Martino Grasselli (Contact Author)

University of Padova - Department of Mathematics ( email )

Via Trieste 63
Padova, Padova
Italy

Léonard de Vinci Pôle Universitaire, Research Center ( email )

Paris La Défense
France

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