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ntruwant
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Joined: August 3rd, 2004, 9:50 am

How do I know that my Heston implementation is ok?

March 11th, 2010, 2:56 pm

hi,I have implemented (Carr Madan FFT) the Heston model for equity options and I have found implementations on the net (Gauss Legendre integration) that give +- the same prices.But how can you be certain that your implementation is ok? Our there benchmarks, ...?
 
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Alan
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How do I know that my Heston implementation is ok?

March 11th, 2010, 7:34 pm

First, make sure you reproduce 6 digits of the example in Kahl & Jackel's Not so complex logarithms article.Second, there are many ways to solve these kinds of problems -- so implement a few more of them. Third, test all the extreme cases: what if V(0) = 0, or the mean reversion is zero, or the vol-of-var is 0, very small or very large, or T is very small or large, or |rho| =1. Did your code break?
Last edited by Alan on March 10th, 2010, 11:00 pm, edited 1 time in total.
 
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ntruwant
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Joined: August 3rd, 2004, 9:50 am

How do I know that my Heston implementation is ok?

March 11th, 2010, 8:22 pm

Thanks a lot Alan!!
 
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mutley
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Joined: February 9th, 2005, 3:51 pm

How do I know that my Heston implementation is ok?

March 13th, 2010, 8:30 am

basic but most important once you have your closed form solutions working - does my MC replicate the calibrating set of europeans accurately? Deep OTM ones? for long timesteps in the simulation? etc
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