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

46 Pages Posted: 7 Jun 2019

See all articles by Ricardo Crisóstomo

Ricardo Crisóstomo

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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 esti-mate 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 optimi-zation. Our analyses show that straightforward setups deliver good calibration re-sults. 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, character-istic functions

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

Suggested Citation

Crisóstomo, Ricardo, An Analyisis of the Heston Stochastic Volatility Model: Implementation and Calibration Using Matlab (2014). CNMV Working Paper No. 58, 2014. Available at SSRN: https://ssrn.com/abstract=3400670 or http://dx.doi.org/10.2139/ssrn.3400670

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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