Models with time-dependent parameters using transform methods: application to Heston's model
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Publication:6206498
arXiv0708.2020MaRDI QIDQ6206498FDOQ6206498
Authors: Alberto Elices 
Publication date: 15 August 2007
Abstract: This paper presents a methodology to introduce time-dependent parameters for a wide family of models preserving their analytic tractability. This family includes hybrid models with stochastic volatility, stochastic interest-rates, jumps and their non-hybrid counterparts. The methodology is applied to Heston's model. A bootstrapping algorithm is presented for calibration. A case study works out the calibration of the time-dependent parameters to the volatility surface of the Eurostoxx 50 index. The methodology is also applied to the analytic valuation of forward start vanilla options driven by Heston's model. This result is used to explore the forward skew of the case study.
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