Many years ago, for an old web site, I developed a nice option value calculator that handles various standard models. It calculates option values, so-called “Greeks”, and “smile curves” for the Black-Scholes model, Merton’s jump-diffusion, and various models with stochastic volatility or stochastic volatility with jumps. You can also use it to extract implied volatilities. Here’s a screenshot:
OptionCity Calculator (Screenshot)
If you’re interested, here is the calculator available for download.
What you get is a zipped file that contains a Windows executable and a tutorial (help) file in pdf format. The software is free to use but is not maintained. After extracting the two files, put both of them in any convenient folder.
A few years back, over at the Wilmott forum, somebody requested some high precision reference prices for the Heston ’93 stochastic volatility model, so as to compare to an implementation. I responded to that with some prices computed in Mathematica to high precision. A number of people found that thread quite useful, and other cases were added over time. Unfortunately, the thread became corrupted after a forum revision. I have gotten a recent request for the same data, so I reproduce some of those results here as perhaps a more permanent record.
With WorkingPrecision=50, I asked Mathematica for 20 good digits, which is probably a conservative estimate of how many good digits there are in the result. (The results have been confirmed by others to at least 15-16 good digits). With that, the results for Put and Call option values were:
Subsequently, Mark Joshi, a well-known researcher who has since passed away, asked for more extreme cases with small T and small volatility, specifically T = V_0 = 0.01. With those changes, but otherwise the same parameters, I found:
Mark found agreement with his results to 6 digits.
Update (Feb 21, 2019). Recently, Wilmott forum member zukimaten did additional checks. He confirmed the accuracy of the first panel of results to machine precision (say 15 digits). For the more difficult second panel, he confirmed the call values with strikes (90,95,100) to 15 leading digits, and the strikes (105, 110) to 13 leading digits. Of course, by put-call parity, similar results can be inferred for the corresponding puts.
I have posted a new research paper to the arXiv titled “Exact Solutions for a GBM-type Stochastic Volatility Model having a Stationary Distribution”. The article may be found here.
Let me explain the title and motivation. The most popular stochastic volatility model is certainly the Heston ’93 model. Its virtues are that it is exactly solvable and it has some very nice features: a mean-reverting, stochastic volatility process that can be negatively correlated with equity returns. This process has the well-known “square-root model” form
where v_t is the instantaneous variance rate of the asset in question. We could also write this evolution in terms of the instantaneous volatility \sigma_t = \sqrt{v_t}. However, time series analysis of the volatility of broad-based indices, such as the S&P500 index, suggests that a better specification would have d \sigma_t \sim \xi \sigma_t dW_t, which is a geometric Brownian motion (GBM)-type volatility. Taking d \sigma_t = \xi \sigma_t dW_t is the well-known SABR model. The problem with that one is that the volatility is not mean-reverting and does not admit a stationary density \psi(\sigma). To get a stationary density, you need a mean-reverting drift term. Also, it would be very nice to also have a model that has exact solutions. The XGBM model may be the first to combine all these properties. It is a standard bivariate model for the pair (S_t,\sigma_t), but here I’m just going to write the volatility evolution, which is
To see how this model is closer to the “real-world” than the Heston ’93 model, take a look at the figures at the end, which show Maximum Likelihood fits to a proxy series for \{\sigma_t\}. The proxy is the daily (annualized) volatility for the S&P500 taken from the Oxford-Man Institutes “realized library”. They maintain a number of estimators — I am using a basic one (rv5) which is simply the daily (intraday) volatility using 5-minute log-return observations. I am using all the data available at the time of this study, which is January 3, 2000 – September 28, 2018 (4705 volatility observations). The first figure shows this volatility time series. You can see there is a maximum of around 140% which is the annualized volatility at the height of the 2007-2008 Financial Crisis.
The next figures show the stationary volatility fits. For these histograms, I am using the annualized volatility in decimal (not percent), so the time series maximum is a histogram entry at \sigma \approx 1.4. That small bump is not really visible, but you can see it is accounted for by the axis extension out to that value.
As one can see, the visual fit is better for XGBM vs. Heston, with corresponding log-likelihoods: 5356 (Heston) vs 5920 (XGBM). In fact, the fit is even better (LL = 6055) for the figure labeled “GARCH -3/2 model”, which is the stationary density corresponding to both the GARCH diffusion model and the 3/2-model. In any event, the point of the exercise is to motivate my new paper and interested readers may find it at the link above.
Stationary volatility density fits for three models
Update. This research paper is now published. The cite is “Lewis, Alan L. (2019), “Exact solutions for a GBM-type stochastic volatility model having a stationary distribution”, Wilmott mag, Vol. 2019, Issue 101, May, 20-41. The editors were kind enough to make it a cover story. As part of that publication, I wrote an additional Introduction, which is available here: XGBMIntro.WMag.Final.
The GARCH diffusion model is one of the running examples of bivariate stochastic volatility models in my first book. (Others include the well-known Heston ’93 model and the so-called 3/2-model). As with most finance models, it comes in two versions: a real-world (aka P-measure) version and a risk-neutral (aka Q-measure) version. The latter is used to value options.
For equity applications, the stochastic process pair is \{S_t,v_t\}. Here S_t \ge 0 is a stock price and v_t = \sigma_t^2 > 0 is the associated stochastic variance rate. Then, the risk-neutral version, as an SDE (stochastic differential equation) system, reads
It’s a very simple and natural model which, unfortunately, lacks exact solutions for option values or transition densities. To determine the unknown parameters in (1), one needs to calculate option prices (numerically) and fit the model to option chains, a procedure generally called “calibration”. To do this efficiently and accurately for this model (and many others) requires a PDE approach. (There have been some earlier calibrations of this model via Monte Carlo).
The lack of an efficient — or, apparently, any — PDE calibration for this model prompted Yiannis Papadopoulos and me to perform one. Our methods and first results were recently posted on the arXiv:
Yiannis’ own announcement may be found in his blog here. You will also find at that link a free downloadable GARCH diffusion calibrator demo that Yiannis has developed. (Windows executable). You can run it on a sample option chain that he supplies, and see a calibration in well under a minute (11 seconds on my desktop). Or you can run it on your own data, simply by imitating the provided data file format.
publisher of the 'Option Valuation under Stochastic Volatility' books
