Mathematical Finance Seminar
RUD 25, 1.115
Eduardo Abi Jaber (Paris Dauphine)

Lifting the Heston model

How to reconcile the classical Heston model with its rough counterpart? We introduce a lifted version of the Heston model with n multifactors 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. Further, our approach speeds up the calibration time and opens the door to time-efficient simulation schemes.