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The Skewness Implied in the Heston Model and Its Application
Author(s) -
Zhang Jin E.,
Zhen Fang,
Sun Xiaoxia,
Zhao Huimin
Publication year - 2017
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21801
Subject(s) - heston model , cumulant , skewness , skew , mathematics , variance (accounting) , affine transformation , lemma (botany) , stochastic volatility , econometrics , statistical physics , economics , statistics , computer science , volatility (finance) , physics , pure mathematics , sabr volatility model , ecology , accounting , poaceae , biology , telecommunications
In this paper, we provide an exact formula for the skewness of stock returns implied in the Heston (1993) model by using a moment‐computing approach. We compute the moments of It o ˆ integrals by using It o ˆ 's Lemma skillfully. The model's affine property allows us to obtain analytical formulas for cumulants. The formulas for the variance and the third cumulant are written as time‐weighted sums of expected instantaneous variance, which are neater and more intuitive than those obtained with the characteristic function approach. Our skewness formula is then applied in calibrating Heston's model by using the market data of the CBOE VIX and SKEW. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:211–237, 2017