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

Financial Institutions ‘Layering’ New Risks as Report Highlights Greenwashing Exposure

The number of financial institutions flagged for greenwashing climbed substantially in the past year, highlighting both the vulnerability of individual firms and the need to integrate greenwashing risk management into decision-making processes.. The sector remained the worst offender for overstating their progress or making vague or misleading claims, the report by sustainability risk data company...

EVENT

Eagle Alpha Alternative Data Conference, London, hosted by A-Team Group

Now in its 8th year, the Eagle Alpha Alternative Data Conference managed by A-Team Group, is the premier content forum and networking event for investment firms and hedge funds.

GUIDE

Enterprise Data Management, 2010 Edition

The global regulatory community has become increasingly aware of the data management challenge within financial institutions, as it struggles with its own challenge of better tracking systemic risk across financial markets. The US regulator in particular is seemingly keen to kick off a standardisation process and also wants the regulatory community to begin collecting additional...