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Smiles all around: FX joint calibration in a multi-Heston model

Author

Listed:
  • Alvise De Col

    (UBS AG)

  • Alessandro Gnoatto

    (Mathematisches Institut, LMU M\"unchen)

  • Martino Grasselli

    (Universit\`a degli Studi di Padova - Dipartimento di Matematica
    D\'epartement Math\'ematiques et Ing\'enierie Financi\`ere, ESILV, Paris La D\'efense)

Abstract

We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.

Suggested Citation

  • Alvise De Col & Alessandro Gnoatto & Martino Grasselli, 2012. "Smiles all around: FX joint calibration in a multi-Heston model," Papers 1201.1782, arXiv.org, revised Jun 2013.
    • Handle: RePEc:arx:papers:1201.1782
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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