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DoubleTrouble
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Joined: November 9th, 2010, 9:46 pm

Gauthier's Smart Parameters for Heston Calibration

January 25th, 2016, 10:37 pm

Hi all,I'm trying to generate good start values for my Levenberg-Marquardt solver and while Googling I found Gauthier's Smart Parameters (Link). The method has been mentioned a couple of times here on the forum as well.What I don't understand about the article is the following. It seems as they only pick an arbitrary expiry for which they pick 2 strikes and solve the system of two quadratic equations.If I have a surface with 10 different expiries, how do I know which expiry I should use when calculating my "smart parameters". Also, how much does the choice of strike prices affect the resulting parameter values?Thanks in advance for any help!Best regards
Last edited by DoubleTrouble on January 25th, 2016, 11:00 pm, edited 1 time in total.
 
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Alan
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Gauthier's Smart Parameters for Heston Calibration

January 26th, 2016, 8:20 pm

I looked briefly and found it quite confusing. It seems like an awful lot of work just to get starting values for rho and xi. Plus, you're right that thetwo starting values will be very sensitive to which expiration you choose. I would just start with rho = -0.6 and xi = 0.8 and get on with it.
 
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DoubleTrouble
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Posts: 83
Joined: November 9th, 2010, 9:46 pm

Gauthier's Smart Parameters for Heston Calibration

January 27th, 2016, 5:45 pm

Thanks for your input Alan. I also read about the same method in this book in chapter 6 - Starting Values. So I figured there's got to be something to it, and I'm interested in know what! :)Maybe I could just e-mail Gauthier if no one here at Wilmott can figure it out.
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