The Heston stochastic volatility model in Hilbert space

DOI10.1080/07362994.2018.1461566zbMATH Open1401.60093arXiv1706.03500OpenAlexW2964284080MaRDI QIDQ4685702FDOQ4685702

Authors: Fred Espen Benth, Iben Cathrine Simonsen 

Publication date: 9 October 2018

Published in: Stochastic Analysis and Applications (Search for Journal in Brave)

Abstract: We extend the Heston stochastic volatility model to a Hilbert space framework. The tensor Heston stochastic variance process is defined as a tensor product of a Hilbert-valued Ornstein-Uhlenbeck process with itself. The volatility process is then defined by a Cholesky decomposition of the variance process. We define a Hilbert-valued Ornstein-Uhlenbeck process with Wiener noise perturbed by this stochastic volatility, and compute the characteristic functional and covariance operator of this process. This process is then applied to the modelling of forward curves in energy markets. Finally, we compute the dynamics of the tensor Heston volatility model when the generator is bounded, and study its projection down to the real line for comparison with the classical Heston dynamics.

Full work available at URL: https://arxiv.org/abs/1706.03500

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zbMATH Keywords

forward pricescommodity marketsinfinite-dimensional Ornstein-Uhlenbeck processesHeston stochastic volatility

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Random fields (60G60) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Applications of functional analysis in probability theory and statistics (46N30)

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Cited In (26)

• Infinite dimensional affine processes
• A complete Markovian stochastic volatility model in the HJM framework
• Well-posedness and invariant measures for HJM models with deterministic volatility and Lévy noise
• On Singularities in the Heston Model
• A feasible central limit theorem for realised covariation of SPDEs in the context of functional data
• Stochastic volatility models at \(\rho = \pm 1\) as second class constrained Hamiltonian systems
• Series Expansions and Direct Inversion for the Heston Model
• The Heston Riemannian distance function
• Affine pure-jump processes on positive Hilbert-Schmidt operators
• The Heston model with stochastic elasticity of variance
• Robustness of Hilbert space-valued stochastic volatility models
• A Barndorff-Nielsen and Shephard model with leverage in Hilbert space for commodity forward markets
• Stationary covariance regime for affine stochastic covariance models in Hilbert spaces
• An explicitly solvable Heston model with stochastic interest rate
• Infinite-dimensional Wishart processes
• On the density of log-spot in the Heston volatility model
• Markovian structure of the Volterra Heston model
• The Alpha‐Heston stochastic volatility model
• Sensitivity analysis in the infinite dimensional Heston model
• A Note on the Discontinuity Problem in Heston's Stochastic Volatility Model
• A weak law of large numbers for realised covariation in a Hilbert space setting
• Infinite dimensional pathwise Volterra processes driven by Gaussian noise -- probabilistic properties and applications --
• An infinite‐dimensional affine stochastic volatility model
• Independent increment processes: a multilinearity preserving property
• Application of the Heston stochastic volatility model for Borsa Istanbul using impression matrix norm
• THE 4/2 STOCHASTIC VOLATILITY MODEL: A UNIFIED APPROACH FOR THE HESTON AND THE 3/2 MODEL

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