Fast-Reversion Limit of the Heston Model
Download this Complimentary Numerix Quantitative Research Paper
In this research paper, Dr. Serguei Mechkov examines the Heston model in the limit of infinitely fast mean-reversion for the stochastic volatility process (CIR). The paper shows that, under an appropriate scaling of the model parameters, the two-factor stochastic volatility Heston model can be exactly mapped to a one-factor pure-jump model that is related to the normal inverse Gaussian (NIG) process.
The "fast-reversion Heston" model thus obtained has only three parameters, which are directly connected to the key properties of the implied volatility surface. The model is expected to provide a reasonable fit to the market at all horizons.
Author: Serguei Mechkov, Senior VP Quantitative Research, Quantitative Research and Development, Numerix
In this research paper, Dr. Serguei Mechkov examines the Heston model in the limit of infinitely fast mean-reversion for the stochastic volatility process (CIR). The paper shows that, under an appropriate scaling of the model parameters, the two-factor stochastic volatility Heston model can be exactly mapped to a one-factor pure-jump model that is related to the normal inverse Gaussian (NIG) process.
The "fast-reversion Heston" model thus obtained has only three parameters, which are directly connected to the key properties of the implied volatility surface. The model is expected to provide a reasonable fit to the market at all horizons.
Author: Serguei Mechkov, Senior VP Quantitative Research, Quantitative Research and Development, Numerix
