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stochastic volatility model for equity derivative
hi, it seems that stochastic volatility models for different types of derivativesare not the same, for example, some models are suitable to FX but notto equity derivative.My question is, what is the popular stochastic volatility models for equity derivatives? why they need to be different from thosemodels for FX derivative or other derivatives?
stochastic volatility model for equity derivative
I think the Heston model is all-around popular. But for individual equities, you alsowant to allow for bankruptcy when that seems plausible, probably not a worry for the major currencies.This means going beyond the Heston model.
stochastic volatility model for equity derivative
There are several popular stochastic volatility models for equity options, and each is important with regard to the assumptions they make.Heston takes vol to follow a CIR process, while Stein&Stein or Scott take vol to follow an Ohrstein Uhlenbeck process, to account for vol's mean-reversion tendencies and for its tractability. A great book on the topic is Fouque's "Introduction to Stochastic Volatility Models".