Allez fait le en français on t'as cramé ;). Je bosse pour les interviews les modéles de volatilités et c'est fou comment tu m'as fait comprendre des trucs que j'ai lu 5 fois. Merci pour ton travail
quite a few new variables added compared to black Scholes method, speed of mean reversion, volatility of the variance, correlation of the two wiener process. Even correlation of the two volatilities would keep fluctuating and not remain constant. Do All these variables increase the accuracy of volatility and underlying price prediction? Does this predict the volatility skew curve shape?
Adding these new parameters allows to build different shapes of volatility surface, while it is flat under the Black-Scholes model. The different parameters can be calibrated to fit as best as possible the observed volatility surface. Stochastic volatility models such as SABR or Heston can be used for interpolation / extrapolation of the volatility surface or to price exotic products. The prime objective of such model is not to predict the future level of volatility or underlying asset price but to price and risk manage options. If you are interested, please have a look at our course: quant-next.com/product/options-pricing-and-risk-management-part-3/ Best regards, Quant Next quant-next.com/
@@quantnext4773 I truly appreciate the huge effort made by this model to build different shapes of volatility surface and extrapolate the same. However, my concern is what will be the accuracy when 6 different variables are used and many of the variables are stochastic
SABR would be more applicable to interpolate / extrapolate time slice volatility curves or for the pricing of path-independent options as there is no parameter to control the term structure of volatility in this model. Heston is more suitable to price path-dependent exotic options, to model the whole volatility surface when you need to price options with different strikes and different maturities as it uses additional parameters to model the term structure of volatility with a mean-reverting Cox-Ingersoll Ross process for the instantaneous volatility. If you are interested to go further, here is the link to our course on the topic: quant-next.com/product/options-pricing-and-risk-management-part-3/
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This is so clear and precise, thank you!
Thanks for the support!
Allez fait le en français on t'as cramé ;). Je bosse pour les interviews les modéles de volatilités et c'est fou comment tu m'as fait comprendre des trucs que j'ai lu 5 fois. Merci pour ton travail
You recognised the French touch !
Thanks for your warm comment :)
Thanks so much! Good explanation!
Thanks for the support!
Thanks 🎉
Thanks for the support!
quite a few new variables added compared to black Scholes method, speed of mean reversion, volatility of the variance, correlation of the two wiener process. Even correlation of the two volatilities would keep fluctuating and not remain constant. Do All these variables increase the accuracy of volatility and underlying price prediction? Does this predict the volatility skew curve shape?
Adding these new parameters allows to build different shapes of volatility surface, while it is flat under the Black-Scholes model. The different parameters can be calibrated to fit as best as possible the observed volatility surface.
Stochastic volatility models such as SABR or Heston can be used for interpolation / extrapolation of the volatility surface or to price exotic products. The prime objective of such model is not to predict the future level of volatility or underlying asset price but to price and risk manage options.
If you are interested, please have a look at our course: quant-next.com/product/options-pricing-and-risk-management-part-3/
Best regards,
Quant Next
quant-next.com/
@@quantnext4773 I truly appreciate the huge effort made by this model to build different shapes of volatility surface and extrapolate the same. However, my concern is what will be the accuracy when 6 different variables are used and many of the variables are stochastic
So when would the Heston/SABR model be more applicable and more closely tied with market pricing?
SABR would be more applicable to interpolate / extrapolate time slice volatility curves or for the pricing of path-independent options as there is no parameter to control the term structure of volatility in this model.
Heston is more suitable to price path-dependent exotic options, to model the whole volatility surface when you need to price options with different strikes and different maturities as it uses additional parameters to model the term structure of volatility with a mean-reverting Cox-Ingersoll Ross process for the instantaneous volatility.
If you are interested to go further, here is the link to our course on the topic: quant-next.com/product/options-pricing-and-risk-management-part-3/