How to create Heston Stochastic Volatility Models in MATLAB
From the Matlab Econometric toolbox help system:
The Heston (heston) class derives directly from SDE from Drift and Diffusion (SDEDDO). Each Heston model is a bivariate composite model, consisting of two coupled univariate models: (10-5)
(10-6)
Equation 10-5 is typically associated with a price process. Equation 10-6 represents the evolution of the price process’ variance. Models of type heston are typically used to price equity options.
Example: Heston Models. Create a heston object to represent the model:
obj = heston (0.1, 0.2, 0.1, 0.05) obj =
Class HESTON: Heston Bi-Variate Stochastic Volatility —————————————————– Dimensions: State = 2, Brownian = 2 —————————————————– StartTime: 0 StartState: 1 (2×1 double array) Correlation: 2×2 diagonal double array Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Return: 0.1 Speed: 0.2 Level: 0.1 Volatility: 0.05
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