Wishart Stochastic Volatility and Flexible Correlation Modeling

Summary

The document describes a multivariate stochastic volatility model in which asset volatility is represented by the trace of a Wishart process. Its main modeling advantage over a classic multifactor Heston model is the ability to represent stochastic correlations with additional degrees of freedom. That flexibility may help the model fit market data while retaining interpretable parameters and tractable calculations.

The text says calibration is easier than for stochastic volatility models generally, but provides no calibration procedure, data, or empirical comparison to support that claim. It does not establish that the Wishart model is especially suitable for emerging markets or explain how high volatility in those markets affects model choice. The discussion is a brief conceptual answer, so its claims should be treated as motivation for further investigation rather than demonstrated evidence.

Key ideas

• The model represents asset volatility as the trace of a Wishart process.
• It can model stochastic correlations with more flexibility than a classic multifactor Heston model.
• The added flexibility may improve fit to market data while preserving parameter interpretability and tractability.
• The document asserts that calibration is easier, but supplies no supporting method or evidence.

Tags

# wishart stochastic volatility models


# wishart stochastic volatility models












Stochastic volatility models assume that volatility follow a random process.In the emerging market the volatility tend to be high. why is it that the wishart stochastic volatility model fit well the emerging market

## Answer by user16651 (score 1)

https://quant.stackexchange.com/a/26307

Generally, the Wishart stochastic volatility model identifies the volatility of the asset as the trace of a Wishart process. Contrary to a classic multifactor Heston model, this model allows to add degrees of freedom with regard to the stochastic correlation. Thanks to its flexibility, this model enables a better fit of market data than the Heston model. Besides, the Wishart volatility model keeps a clear interpretation of its parameters and conserves an efficient tractability.It was showed that calibration of Wishart stochastic volatility model is easier than SV model.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.