An Analysis of the Heston Stochastic Volatility Model: Implementation and Calibration Using Matlab

CNMV Working Paper No 58

34 Pages Posted: 20 Nov 2014 Last revised: 29 Jul 2016

See all articles by Ricardo Crisóstomo

Ricardo Crisóstomo

Comisión Nacional del Mercado de Valores (CNMV); Universidad Nacional de Educacion a Distancia (UNED)

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Date Written: December 17, 2014

Abstract

This paper analyses the implementation and calibration of the Heston Stochastic Volatility Model. We first explain how characteristic functions can be used to estimate option prices. Then we consider the implementation of the Heston model, showing that relatively simple solutions can lead to fast and accurate vanilla option prices. We also perform several calibration tests, using both local and global optimization. Our analyses show that straightforward setups deliver good calibration results. All calculations are carried out in Matlab and numerical examples are included in the paper to facilitate the understanding of mathematical concepts.

Keywords: Stochastic volatility, Heston, Black-Scholes biases, calibration, characteristic functions

JEL Classification: G13, C51, C52, C61, C63

Suggested Citation

Crisóstomo, Ricardo, An Analysis of the Heston Stochastic Volatility Model: Implementation and Calibration Using Matlab (December 17, 2014). CNMV Working Paper No 58. Available at SSRN: https://ssrn.com/abstract=2527818 or http://dx.doi.org/10.2139/ssrn.2527818

Ricardo Crisóstomo (Contact Author)

Comisión Nacional del Mercado de Valores (CNMV) ( email )

C/ Edison, 4
Madrid, Madrid 28006
Spain

Universidad Nacional de Educacion a Distancia (UNED)

Calle Bravo Murillo, 38
Madrid, Madrid 28015
Spain

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