The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

Pricing Partners Implements Double-Heston Model for its Equity Module

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.”

Related content

WEBINAR

Recorded Webinar: A new way of collaborating with data

Digital transformation in the financial services sector has raised many questions around data, including the cost and volume of reference data required by each financial institution. Firms want to pick and choose the reference data they need to fulfil their requirements. Emerging solutions with the potential to decrease the cost of data and increase flexibility...

BLOG

Derivatives Service Bureau Sets Timeline for Consultation on OTC ISIN and CFI Services in 2022

The Derivatives Service Bureau (DSB) has published the timeline for its 2021 industry consultation on 2022 OTC ISIN and CFI service provision. Core themes focus on providing updates for service enhancements sought last year, as well as risk analysis relating to the DSB’s cybersecurity and cloud resilience. The OTC ISIN and CFI consultation will operate...

EVENT

Virtual Briefing: ESG Data Management – A Strategic Imperative

This briefing will explore challenges around assembling and evaluating ESG data for reporting and the impact of regulatory measures and industry collaboration on transparency and standardisation efforts. Expert speakers will address how the evolving market infrastructure is developing and the role of new technologies and alternative data in improving insight and filling data gaps.

GUIDE

Practicalities of Working with the Global LEI

This special report accompanies a webinar we held on the popular topic of The Practicalities of Working with the Global LEI, discussing the current thinking around best practices for entity identification and data management. You can register here to get immediate access to the Special Report.