Option pricing in the Heston stochastic volatility model: an empirical evaluation

Altmeyer, Patrick; Grapendal, Jacob Daniel; Pravosud, Makar; Quintana, Gand Derry

Option pricing in the Heston stochastic volatility model: an empirical evaluation

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Altmeyer, P, Grapendal, J, Pravosud, M, Quintana, G. Option pricing in the Heston stochastic volatility model: an empirical evaluation. 2018. handle: http://hdl.handle.net/10230/35862

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Abstract

This paper evaluates the calibration method of the Heston model presented by Alòs, De Santiago, and Vives (2015). We propose a slightly more efficient configuration of the optimization procedure by introducing initial bounds on parameters. Using an extensive simulation study we generally obtain parameter estimates in agreement with true values. In an empirical application carried out onto high-frequency option data the calibration method fails to generate satisfactory results. Nonetheless, we conclude that similarly simple calibration methods as the one examined here should be used in combination with more sophisticated option pricing models.