About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Pricing Partners Implements Double-Heston Model for its Equity Module

Subscribe to our newsletter

Pricing Partners announced today a state-of the art stochastic volatility model, the Double-Heston Model, to be implemented for its Equity, FX and Commodity Module to enrich its Price-it Library. Based on the Heston Model generated by Steven Heston, Double-Heston Model is identified as an extension committed to forecasting a more flexible approach to model the stochastic variance.

Stochastic volatility models have replaced Black-Scholes model since they are able to generate a volatility smile. However, standard models fail to capture the smile slope and level movements. The Double Heston Model is able to model the asset diffusion with two independent variance and processes. In this implementation, Double-Heston Model is calibrated thanks to a differential evolution (for global optimisation) and Levenberg Marquardt (for local optimisation) algorithm, leading to a significantly improved market fit. Indeed, this model can cope with very stiff volatilities skews and is more robust in calibration than the single Heston. As for the Monte-Carlo diffusion, Pricing Partners has invented a new fast Quadratic Exponential scheme derived from the one of Andersen done for the simple Heston. This numerical scheme converges very rapidly. A technical paper can be downloaded on the SSRN website.

Pierre Gauthier, financial engineer, comments: “Together with Dylan, we have performed extensive numerical tests with the Double Heston. We have fine tuned numerical parameters so that Double Heston model works at its best. Thanks to the newly implemented differential evolution, Double Heston model has a close fit to the implied volatility surface. Besides, Monte Carlo simulation is very efficient thanks to a fast converging numerical scheme.”

Eric Benhamou, CEO of Pricing Partners, adds: “At Pricing Partners, we are constantly improving our pricing models to better capture and model risk. The double Heston is a masterpiece and provides a very accurate modeling of volatilities skew. This is quite valuable for equity, indexes and funds derivatives products revaluation as initial strikes that were initially close to the At The Money strikes are now very off and are relying on the underlying assumption of the volatility on the tails. The double Heston model provides very accurate interpolation/extrapolation of the volatility smile and hence gives reliable and accurate valuation. In addition, it strengthens even more our position of the leading provider of cutting edge pricing models and analytics.”

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: End-to-End Lineage for Financial Services: The Missing Link for Both Compliance and AI Readiness

The importance of complete robust end-to-end data lineage in financial services and capital markets cannot be overstated. Without the ability to trace and verify data across its lifecycle, many critical workflows – from trade reconciliation to risk management – cannot be executed effectively. At the top of the list is regulatory compliance. Regulators demand a...

BLOG

Nature-Risk Data Proposals Hailed as Pathway to Better Investment Decisions

Proposals to improve the nature-risk data value chain has been welcomed by sustainability data leaders who said they will pave the way for better decision making and reporting by financial institutions and provide more detailed analyses for investors. The proposals offer a slate of principles to improve the quality of state-of-nature data collection and integration...

EVENT

Data Management Summit New York City

Now in its 15th year the Data Management Summit NYC brings together the North American data management community to explore how data strategy is evolving to drive business outcomes and speed to market in changing times.

GUIDE

The Global LEI System – A Solution for Entity Data?

The Global LEI System – or GLEIS – has been in development since the middle of last year. Development has been patchy at times, but much has been done, leaving fewer outstanding issues, but also raising new questions. What’s emerging is a structure for the GLEIS going forward, complete with a mechanism for registering and...