Calculating Vega and Volga with Heston MC
Posted: September 16th, 2006, 3:11 pm
by Braveheart
Is it right to assume that vega in the HestonSV model is approximated by a 1% change in V_0 the short variance?If that is true is volga then then change in vega calculated using V_0 or should I be using a 1% change in the volatility of volatility parameter to approximate volga?Thanks in advance for any answers.
Calculating Vega and Volga with Heston MC
Posted: January 16th, 2007, 11:04 pm
by markhadley
just my $.02: often when implied vols move, the whole surface will move in parallel. (a PCA will show you this). to reflect the parallel shocks best, it might be better to shock both the initial and long-run volatilty parameters by 1%. this will shock the forward ATM implied vol term structure roughly in parallel (the implied vols in the tails, on the other hand will not be shocked in parallel). But all the same, this is a better way of reflecting vega.