2018/10/11 by Jaber, Eduardo Abi
#Computational Finance (q-fin.CP) #FOS: Economics and business #FOS: Mathematics #Probability (math.PR)
paper · doi:10.48550/arxiv.1810.04868
How to reconcile the classical Heston model with its rough counterpart? We introduce a lifted version of the Heston model with n multi-factors, sharing the same Brownian motion but mean reverting at different speeds. Our model nests as extreme cases the classical Heston model (when n = 1), and the rough Heston model (when n goes to infinity). We show that the lifted model enjoys the best of both worlds: Markovianity and satisfactory fits of implied volatility smiles for short maturities with very few parameters. Further, our approach speeds up the calibration time and opens the door to time-efficient simulation schemes.