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
written blog

The Market Impact of SOFR Discounting: What We Know So Far

press release - Feb 12, 2020

CubeLogic and Numerix partnership yields rapid results - Two new client signings within eight months

white paper

White paper | The Capital Markets 2020: In the Eye of Two Storms

on-demand webinar

The LIBOR Transition in 2020: Roundtable Discussion with Numerix and Greenwich Associates

white paper

White paper | Analyzing the Market Impact of SOFR Discounting

analyst report

Greenwich Associates EBook: Trading, Technology and the LIBOR Transition

conference

GARP Risk Convention 2020

journal issue

Numerix Journal Vol. 6, No. 1

newsletter issue - Dec 11, 2019

Thinking Derivatively - December 2019 Issue

quantitative research

STIRs and OIS Futures in the Hull-White Model

on-demand webinar

Applying AI to Streamline the LIBOR Transition

on-demand webinar

Greenwich Associates On-Demand Webinar | Trading, Technology and the Libor Transition