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Convergence of Heston to SVI

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  • Jim Gatheral
  • Antoine Jacquier

Abstract

In this short note, we prove by an appropriate change of variables that the SVI implied volatility parameterization presented in Gatheral's book and the large-time asymptotic of the Heston implied volatility agree algebraically, thus confirming a conjecture from Gatheral as well as providing a simpler expression for the asymptotic implied volatility in the Heston model. We show how this result can help in interpreting SVI parameters.
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Suggested Citation

  • Jim Gatheral & Antoine Jacquier, 2011. "Convergence of Heston to SVI," Quantitative Finance, Taylor & Francis Journals, vol. 11(8), pages 1129-1132.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:8:p:1129-1132
    DOI: 10.1080/14697688.2010.550931
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    References listed on IDEAS

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    1. Roger W. Lee, 2004. "The Moment Formula For Implied Volatility At Extreme Strikes," Mathematical Finance, Wiley Blackwell, vol. 14(3), pages 469-480, July.
    2. Martin Forde & Antoine Jacquier & Aleksandar Mijatovic, 2009. "Asymptotic formulae for implied volatility in the Heston model," Papers 0911.2992, arXiv.org, revised May 2010.
    3. Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, December.
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