You've pointed out exactly what the idea lacks - financial interpretation - in fact, i read a paper a while ago "The Case for Time Homogeneity" by Philippe Henrotte where the author essentially says that if we move away from time homogeneity to obtain satisfactory results then we have probably failed to adequately describe the dynamics of the process considered. That being said, i'm pursuing the idea simply because i see that it is possible to obtain semi-analytic results for european and forward starting options (working on this). My question now is - considering that you dont like the idea, is there an approach to analysing the model that would convince you that the approach is worth pursuing?

In "Efficient Calibration of Time-Changed Levy Models to Forward Implied Volatility Surfaces" by Stefan Kassberger & Hanno Schmidt the authors observe that forward implied volatilities are largely undetermined for a model that is calibrated only to vanilla options (they considered several models with analytic characteristic functions in a time homogeneous setting). This problem seems to arise as the objective function has several localminima of comparable quality. If this time-dependent approach allows us to better specify (in some way) forward implied volatilities would it then be worth considering?

Thanks for suggesting that paper --- just got my copy from one of the authors and will take a look.Regarding your previous question, time-dependent coefficients would seem helpful if the time dependencecould be -explained- by: (i) earnings release dates for the underlyings (equity options) or some other known characteristic(ii) some volatility seasonality, or govt major releases, or some other known characteristic (index options).If you can do this, I would be interested in seeing your thesis.

QuoteOriginally posted by: AlanThis 'dramatic Figure 1" I am pointing you to is based on INTC, which has this ivol. recent pattern:This chart is being posted on Sunday July 15, 2007 and has data through friday Jul 13.But INTC is announcing earnings after the close on tues.So, I'll post this INTC chart again once it is updated through weds, where I expect to see a jump down in this implied vol. index.[Well, unless the stock drops alot. And who says finance is not predictive Actually, I don't have to post a new chart as the chart link is updating daily automatically. The jump down was right on scheduleand is apparent: the IV index moves from about 35% just prior to the earnings release to about 25% afterward . (If you are reading this post more than one year from July, 2007, if will have scrolled off to the left.)

Does anyone have a copy of the paper "Efficient Calibration of Time-Changed Levy Models to Forward Implied Volatility Surfaces" by Stefan Kassberger & Hanno Schmidt, that has been mentioned in this thread? Apparently it has been published only as Conference Proceedings, and will be very hard for me to get hold of otherwise. Thanks, Martin

Dear all,We have also been working on a stochastic volatility project. We want to calibrate Heston model for fx options.We wanted to use ASA for calibration.Sergei Mikhailov, Ulrich Nögel state in their paper 'Heston’s Stochastic Volatility,Model Implementation,Calibration and Some Extensions' that 'In contrast to the local optimizers the initial guess is (hopefully)irrelevant in the concept of stochastic optimization.' And they use ASA for calibration.When we try to calibrate Heston model with ASA using a data set which consists of 42 options on a spesific day we see that calibration results totaly depend on initial parameters.Further although we get different calibrated values ,these different set ofparameters equally work well,we have very minor errors for each of them.We wonder where the problem is.Can it be something related to number of data points i.e should we take e.g 84 options on that day in stead of 42 options?We want look at the term structure of parameters then how can we achieve this if there are 2 different set of parameters which work equally well for a spesific day.I mean how can we handle with that multiplicity problem?Thank you very much for your help.Best regards,