Download Quantitative Research | Hot Start Initialization of the Heston ModelWe suggest a new way of setting up multifactor models with hidden variables. We claim that the standard initial condition, which assigns some fixed value to the stochastic volatility subprocess, is illogical and greatly underestimates the effect of the hidden variable. For instance, a stochastic volatility model generates a significantly weaker implied volatility smile at short maturities. A good initial condition should specify the distribution of the hidden variable instead of a particular fixed value. The most straightforward way of initializing a hidden variable is by specifying its equilibrium distribution, which assumes that this component of the multifactor process has been started well before the observable part. As a practical example, the Heston model is considered.

Author: Dr. Serguei Mechkov, Senior VP of Quantitative Research, Quantitative Research, Numerix

Download Numerix Research Paper

Complete the form below to download this complimentary research paper.

Select Form: 

Form #5: Research

Keep me informed of future research from Numerix:

Sign me up to receive "Thinking Derivatively" monthly newsletter by Numerix:

* Required fields
newsletter issue - Sep 10, 2019

Thinking Derivatively - September 2019 Issue

news - article pdf - Aug 20, 2019

Americas Derivatives Awards 2019 | Data and Analytics Vendor of the Year

newsletter issue - Aug 12, 2019

Thinking Derivatively - August 2019 Issue

conference

Sibos 2019

video blog

Accelerate Your LIBOR Transition

on-demand webinar

Curve Construction Beyond LIBOR

newsletter issue - Jul 17, 2019

Thinking Derivatively - July 2019 Issue

numerix conference

Join us for NEXT 2019 - the Numerix User Conference

press release - Jun 21, 2019

New Book “Modern SABR Analytics” Authored by Numerix Focuses on How to Enhance the SABR Model for...

on-demand webinar

On-Demand Resource | Dawn of Alternative Reference Rates: Curve Construction Fundamentals

white paper

White paper | LIBOR Will Not Transition Quietly: What You Need to Know Now

newsletter issue - Jun 10, 2019

Thinking Derivatively - June 2019 Issue