Heston stochastic vol-of-vol model for joint calibration of VIX and S\&P 500 options
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Heston stochastic vol-of-vol model for joint calibration of VIX and S\&P 500 options
Heston stochastic vol-of-vol model for joint calibration of VIX and S\&P 500 options
Abstract: A parsimonious generalization of the Heston model is proposed where the volatility-of-volatility is assumed to be stochastic. We follow the perturbation technique of Fouque et al (2011, CUP) to derive a first order approximation of the price of options on a stock and its volatility index. This approximation is given by Heston's quasi-closed formula and some of its Greeks. It can be very efficiently calculated since it requires to compute only Fourier integrals and the solution of simple ODE systems. We exemplify the calibration of the model with S&P 500 and VIX data.
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Cited in
(40)- A scaled version of the double-mean-reverting model for VIX derivatives
- The complete Gaussian kernel in the multi-factor Heston model: option pricing and implied volatility applications
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