TITLE:
Performance of the Heston’s Stochastic Volatility Model: A Study in Indian Index Options Market
AUTHORS:
Shivam Singh, Alok Dixit
KEYWORDS:
Black-Scholes, Heston, Stochastic Volatility, Two Scale Realized Volatility, Tick-by-Tick Data, Indian Options Market
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.2,
April
6,
2016
ABSTRACT: This study attempts to
analyse one-day-ahead out-of-sample performance of the stochastic volatility
model of Heston (SVH) in the Indian context. Also, the study compares the ex-ante performance of the SVH with that
of a Two-Scale-Realised-Volatility (TSRV)-based Black-Scholes model (BS) using
the liquidity-weighted performance metrics. For the purpose, we utilise the
tick-by-tick data of the CNX Nifty index and options thereon, the most liquid
equity options in the world in terms of the number of contracts traded1.
Additionally, the study compares the two models across subgroups based on the
moneyness, volatility of the underlying and time-to-expiration of the options.
The results establish that the SVH model is better than the BS model in pricing
equity index options. Further, the SVH model appears to be superior across all
the subgroups, for both call options and put options.