We model the volatility of a single risky asset using a multifactor (matrix) Wishart affine process, recently introduced in finance by Gourieroux and Sufana. As in standard Duffie and Kan affine models the pricing problem can be solved through the Fast Fourier Transform of Carr and Madan. A numerical illustration shows that this specification provides a separate fit of the long-term and short-term implied volatility surface and, differently from previous diffusive stochastic volatility models, it is possible to identify a specific factor accounting for the stochastic leverage effect, a well-known stylized fact of the FX option markets analysed by Carr and Wu.

A multifactor volatility Heston model

TEBALDI, CLAUDIO
2008

Abstract

We model the volatility of a single risky asset using a multifactor (matrix) Wishart affine process, recently introduced in finance by Gourieroux and Sufana. As in standard Duffie and Kan affine models the pricing problem can be solved through the Fast Fourier Transform of Carr and Madan. A numerical illustration shows that this specification provides a separate fit of the long-term and short-term implied volatility surface and, differently from previous diffusive stochastic volatility models, it is possible to identify a specific factor accounting for the stochastic leverage effect, a well-known stylized fact of the FX option markets analysed by Carr and Wu.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/2690991
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