static void Main(string[] args)
{
// Classes
BisectionAlgo BA = new BisectionAlgo();
BlackScholesPrice BS = new BlackScholesPrice();
HestonPrice HP = new HestonPrice();
ElicesAlgo EA = new ElicesAlgo();
NelderMeadAlgo NM = new NelderMeadAlgo();
ObjectiveFunction OF = new ObjectiveFunction();
// 32-point Gauss-Laguerre Abscissas and weights
double[] X = new Double[32];
double[] W = new Double[32];
using (TextReader reader = File.OpenText("../../GaussLaguerre32.txt"))
{
for (int k = 0; k <= 31; k++)
{
string text = reader.ReadLine();
string[] bits = text.Split(' ');
X[k] = double.Parse(bits[0]);
W[k] = double.Parse(bits[1]);
}
}
// Bounds on the parameter estimates
// kappa theta sigma v0 rho
double e = 1.0e-2;
double[] lb = new double[5] {
e, e, e, -0.99, e
};
double[] ub = new double[5] {
10.0, 3.0, 10.0, 0.99, 3.0
};
// Read in SP500 implied volatilities
const int NT = 4;
const int NK = 13;
double[][] MktIV = new double[NT][];
MktIV[0] = new double[NK] {
0.1962, 0.1910, 0.1860, 0.1810, 0.1761, 0.1718, 0.1671, 0.1644, 0.1645, 0.1661, 0.1701, 0.1755, 0.1796
};
MktIV[1] = new double[NK] {
0.1947, 0.1905, 0.1861, 0.1812, 0.1774, 0.1743, 0.1706, 0.1671, 0.1641, 0.1625, 0.1602, 0.1610, 0.1657
};
MktIV[2] = new double[NK] {
0.2019, 0.1980, 0.1943, 0.1907, 0.1871, 0.1842, 0.1813, 0.1783, 0.1760, 0.1743, 0.1726, 0.1716, 0.1724
};
MktIV[3] = new double[NK] {
0.2115, 0.2082, 0.2057, 0.2021, 0.2000, 0.1974, 0.1950, 0.1927, 0.1899, 0.1884, 0.1862, 0.1846, 0.1842
};
double[] K = new double[NK] {
124.0, 125.0, 126.0, 127.0, 128.0, 129.0, 130.0, 131.0, 132.0, 133.0, 134.0, 135.0, 136.0,
};
double[] T = new double[NT] {
37.0 / 365.0, 72.0 / 365.0, 135.0 / 365.0, 226.0 / 365.0
};
// PutCall identifier
string PutCall = "P";
// Maturity increments
double[] tau = new double[NT];
tau[0] = T[0];
for (int t = 1; t <= NT - 1; t++)
{
tau[t] = T[t] - T[t - 1];
}
// Option settings
OPSet opsettings;
opsettings.S = 129.14;
opsettings.r = 0.0010;
opsettings.q = 0.0068;
opsettings.trap = 1;
// Obtain the market prices for Elices, jagged array, and Heston (two dimensional array)
double[][] MktPrice = new double[4][];
double[,] MktPriceH = new double[NT, NK];
double[,] MktIVH = new double[NT, NK];
for (int t = 0; t <= NT - 1; t++)
{
MktPrice[t] = new double[13];
for (int k = 0; k <= NK - 1; k++)
{
MktPrice[t][k] = BS.BlackScholes(opsettings.S, K[k], T[t], opsettings.r, opsettings.q, MktIV[t][k], PutCall);
MktPriceH[t, k] = MktPrice[t][k];
MktIVH[t, k] = MktIV[t][k];
}
}
// Settings for the Elices objective function
OFSetE ofsetE = new OFSetE();
ofsetE.opsettings = opsettings;
ofsetE.X = X;
ofsetE.W = W;
ofsetE.LossFunction = 1;
ofsetE.lb = lb;
ofsetE.ub = ub;
// Elices Settings for the Market data
MktData MktData = new MktData();
MktData.K = K;
MktData.PutCall = PutCall;
ofsetE.data = MktData;
// Settings for the Heston objective function
OFSetH ofsetH = new OFSetH();
ofsetH.opsettings = opsettings;
ofsetH.X = X;
ofsetH.W = W;
ofsetH.LossFunction = ofsetE.LossFunction;
ofsetH.lb = ofsetE.lb;
ofsetH.ub = ofsetE.ub;
ofsetH.MktPrice = MktPriceH;
ofsetH.MktIV = MktIVH;
ofsetH.K = K;
ofsetH.T = T;
ofsetH.PutCall = PutCall;
// Parameter initial values
double kappaS = 2.00;
double thetaS = 0.10;
double sigmaS = 1.20;
double v0S = 0.03;
double rhoS = -0.80;
// Heston and Elices starting values (vertices) in vector form. Add random increment about each starting value
double[,] startH = new double[5, 6];
double[,] startE = new double[4, 5];
for (int j = 0; j <= 5; j++)
{
startH[0, j] = kappaS + BA.RandomNum(-0.05, 0.05) * kappaS;
startH[1, j] = thetaS + BA.RandomNum(-0.05, 0.05) * thetaS;
startH[2, j] = sigmaS + BA.RandomNum(-0.05, 0.05) * sigmaS;
startH[3, j] = rhoS + BA.RandomNum(-0.05, 0.05) * rhoS;
startH[4, j] = v0S + BA.RandomNum(-0.05, 0.05) * v0S;
}
for (int j = 0; j <= 4; j++)
{
startE[0, j] = startH[0, j];
startE[1, j] = startH[1, j];
startE[2, j] = startH[2, j];
startE[3, j] = startH[3, j];
}
// Settings for the Nelder Mead algorithm
NMSet nmsettings = new NMSet();
nmsettings.MaxIters = 50; // Maximum number of iterations
nmsettings.Tolerance = 1e-20; // Tolerance on best and worst function values
nmsettings.ofsettingsE = ofsetE; // Settings for the Elices objective function
nmsettings.ofsettingsH = ofsetH; // Settings for the Heston objective function
// Heston Parameter Estimation all maturities ===========================================================================================
nmsettings.choice = "Heston";
int N = 5;
nmsettings.N = N;
double[] ParamH = new double[7];
ParamH = NM.NelderMead(OF.f, nmsettings, startH);
// Elices Parameter Estimation maturity by maturity ====================================================================================
nmsettings.choice = "Elices";
N = 4;
nmsettings.N = N;
double v0 = ParamH[4];
ofsetE.v0 = v0;
double[][] ParamTD = new double[4][];
double[] B = new double[6];
double[] LossFunction = new double[NT];
// Initialize maturities
List <double> MatsList = new List <double>();
double[] Mats;
MatsList.Add(tau[0]);
MatsList.Add(tau[1]);
Mats = MatsList.ToArray();
// Loop through the maturities, estimating parameters
for (int t = 0; t <= NT - 1; t++)
{
ofsetE.t = t;
ofsetE.data.MktIV = MktIV[t]; // Vector of market Implied vol
ofsetE.data.MktPrice = MktPrice[t]; // Vector of market prices
ofsetE.paramfixed = ParamTD; // Fixed parameters
if (t >= 1)
{
for (int j = 0; j <= N; j++) // Starting values are last period's estimates
{
startE[0, j] = B[0] + BA.RandomNum(-0.01, 0.01) * B[0];
startE[1, j] = B[1] + BA.RandomNum(-0.01, 0.01) * B[1];
startE[2, j] = B[2] + BA.RandomNum(-0.01, 0.01) * B[2];
startE[3, j] = B[3] + BA.RandomNum(-0.01, 0.01) * B[3];
}
}
if (t >= 2)
{
MatsList.Add(tau[t]);
Mats = MatsList.ToArray();
}
ofsetE.T = Mats;
nmsettings.ofsettingsE = ofsetE;
B = NM.NelderMead(OF.f, nmsettings, startE);
ParamTD[t] = new double[4] {
B[0], B[1], B[2], B[3]
};
LossFunction[t] = B[4];
Console.WriteLine("------ Finished maturity {0:F0} ------", ofsetE.t);
}
// Write the parameters
Console.WriteLine("Heston statict parameters");
Console.WriteLine("------------------------------------------------------------------");
Console.WriteLine(" kappa theta sigma rho v0 LossFunction");
Console.WriteLine("------------------------------------------------------------------");
Console.WriteLine("{0,10:F5} {1,10:F5} {2,10:F5} {3,10:F5} {4,10:F5} {5,10:F5}",
ParamH[0], ParamH[1], ParamH[2], ParamH[3], ParamH[4], ParamH[5]);
Console.WriteLine("------------------------------------------------------------------");
Console.WriteLine(" ");
Console.WriteLine("Elices Time dependent parameters");
Console.WriteLine("-------------------------------------------------------------");
Console.WriteLine(" kappa theta sigma rho LossFunction");
Console.WriteLine("-------------------------------------------------------------");
for (int t = 0; t <= NT - 1; t++)
{
Console.WriteLine("{0,10:F5} {1,10:F5} {2,10:F5} {3,10:F5} {4,10:F5}",
ParamTD[t][0], ParamTD[t][1], ParamTD[t][2], ParamTD[t][3], LossFunction[t]);
}
Console.WriteLine("-------------------------------------------------------------");
// Fitting Elices prices and implied vols ==========================================================================================================
// Matrices for prices, parameters, and fixed parameters
double[,] PriceE = new double[NK, NT];
double[] param = new double[4];
double[][] paramfixed = new double[NT - 1][];
paramfixed[0] = ParamTD[0];
// Define the dynamic array for the maturities and assign the first two maturities
List <double> MatList = new List <double>();
double[] Mat;
MatList.Add(tau[0]);
MatList.Add(tau[1]);
Mat = MatList.ToArray();
// Elices Implied volatilities
double[,] IVE = new double[NK, NT];
double a = 0.01;
double b = 3.0;
double tol = 1.0e-5;
int MaxIter = 1000;
double ElicesIVRMSE = 0.0;
// Find the prices and implied vols
for (int t = 0; t <= NT - 1; t++)
{
for (int j = 0; j <= 3; j++)
{
param[j] = ParamTD[t][j];
}
if (t == 0)
{
for (int k = 0; k <= NK - 1; k++)
{
PriceE[k, 0] = EA.ElicesPrice(PutCall, opsettings.S, K[k], Mat, opsettings.r, opsettings.q, param, v0, opsettings.trap, X, W);
}
}
if (t == 1)
{
for (int k = 0; k <= NK - 1; k++)
{
PriceE[k, 1] = EA.ElicesPrice(PutCall, opsettings.S, K[k], Mat, opsettings.r, opsettings.q, param, v0, opsettings.trap, X, W, paramfixed);
}
}
if (t >= 2)
{
MatList.Add(tau[t]);
Mat = MatList.ToArray();
paramfixed[t - 1] = ParamTD[t - 1];
for (int k = 0; k <= NK - 1; k++)
{
PriceE[k, t] = EA.ElicesPrice(PutCall, opsettings.S, K[k], Mat, opsettings.r, opsettings.q, param, v0, opsettings.trap, X, W, paramfixed);
}
}
for (int k = 0; k <= NK - 1; k++)
{
IVE[k, t] = BA.BisecBSIV(PutCall, opsettings.S, K[k], opsettings.r, opsettings.q, T[t], a, b, PriceE[k, t], tol, MaxIter);
ElicesIVRMSE += Math.Pow(IVE[k, t] - MktIV[t][k], 2.0);
}
}
// Fitting Heston prices and implied vols ==========================================================================================================
double[,] PriceH = new double[NK, NT];
double[,] IVH = new double[NK, NT];
HParam ParamTI = new HParam();
ParamTI.kappa = ParamH[0];
ParamTI.sigma = ParamH[1];
ParamTI.theta = ParamH[2];
ParamTI.rho = ParamH[3];
ParamTI.v0 = ParamH[4];
double HestonIVRMSE = 0.0;
for (int k = 0; k <= NK - 1; k++)
{
for (int t = 0; t <= NT - 1; t++)
{
PriceH[k, t] = HP.HestonPriceGaussLaguerre(ParamTI, ofsetH.opsettings, K[k], T[t], PutCall, X, W);
IVH[k, t] = BA.BisecBSIV(PutCall, opsettings.S, K[k], opsettings.r, opsettings.q, T[t], a, b, PriceH[k, t], tol, MaxIter);
HestonIVRMSE += Math.Pow(IVH[k, t] - MktIVH[t, k], 2.0);
}
}
Console.WriteLine("Heston IVRMSE {0,2:E5}", HestonIVRMSE);
Console.WriteLine("Elices IVRMSE {0,2:E5}", ElicesIVRMSE);
}
// Nelder Mead Algorithm ===============================================================================================
public double[] NelderMead(ObjFun f, NMSet nmsettings, double[,] x)
{
ObjectiveFunction OF = new ObjectiveFunction();
OFSetE ofsetE = nmsettings.ofsettingsE;
OFSetH ofsetH = nmsettings.ofsettingsH;
int N = nmsettings.N;
int MaxIters = nmsettings.MaxIters;
string choice = nmsettings.choice;
double Tolerance = nmsettings.Tolerance;
int NumIters = 0;
int i, j;
// Value of the function at the vertices
double[][] F = new Double[N + 1][];
for (i = 0; i <= N; i++)
{
F[i] = new double[2] {
0.0, 0.0
}
}
;
// Step 0. Ordering and Best and Worst points
// Order according to the functional values, compute the best and worst points
step0:
NumIters = NumIters + 1;
Console.Write("Nelder Mead iteration ");
Console.WriteLine(NumIters);
for (j = 0; j <= N; j++)
{
double[] z = new double[N];
for (i = 0; i <= N - 1; i++)
{
z[i] = x[i, j];
F[j][0] = OF.f(z, ofsetE, ofsetH, choice); // Function values
F[j][1] = j; // Original index positions
}
}
// Sort the F array w.r.t column 0
int column = 0;
Array.Sort(F, delegate(double[] w1, double[] w2)
{
return((w1[column] as IComparable).CompareTo(w2[column]));
});
// New vertices order first N best initial vectors and
// last (N+1)st vertice is the worst vector
// y is the matrix of vertices, ordered so that the worst vertice is last
double[,] y = new double[N, N + 1];
for (j = 0; j <= N; j++)
{
for (i = 0; i <= N - 1; i++)
{
y[i, j] = x[i, Convert.ToInt32(F[j][1])];
}
}
// First best vector y(1) and function value f1
double[] x1 = new double[N]; for (i = 0; i <= N - 1; i++)
{
x1[i] = y[i, 0];
}
double f1 = OF.f(x1, ofsetE, ofsetH, choice);
// Last best vector y(N) and function value fn
double[] xn = new Double[N]; for (i = 0; i <= N - 1; i++)
{
xn[i] = y[i, N - 1];
}
double fn = OF.f(xn, ofsetE, ofsetH, choice);
// Worst vector y(N+1) and function value fn1
double[] xn1 = new Double[N]; for (i = 0; i <= N - 1; i++)
{
xn1[i] = y[i, N];
}
double fn1 = OF.f(xn1, ofsetE, ofsetH, choice);
// z is the first N vectors from y, excludes the worst y(N+1)
double[,] zz = new Double[N, N];
for (j = 0; j <= N - 1; j++)
{
for (i = 0; i <= N - 1; i++)
{
zz[i, j] = y[i, j];
}
}
// Mean of best N values and function value fm
double[] xm = new Double[N]; xm = VMean(zz, N);
double fm = OF.f(xm, ofsetE, ofsetH, choice);
// Reflection point xr and function fr
double[] xr = new Double[N]; xr = VSub(VAdd(xm, xm), xn1);
double fr = OF.f(xr, ofsetE, ofsetH, choice);
// Expansion point xe and function fe
double[] xe = new Double[N]; xe = VSub(VAdd(xr, xr), xm);
double fe = OF.f(xe, ofsetE, ofsetH, choice);
// Outside contraction point and function foc
double[] xoc = new Double[N]; xoc = VAdd(VMult(xr, 0.5), VMult(xm, 0.5));
double foc = OF.f(xoc, ofsetE, ofsetH, choice);
// Inside contraction point and function foc
double[] xic = new Double[N]; xic = VAdd(VMult(xm, 0.5), VMult(xn1, 0.5));
double fic = OF.f(xic, ofsetE, ofsetH, choice);
while ((NumIters <= MaxIters) && (Math.Abs(f1 - fn1) >= Tolerance))
{
// Step 1. Reflection Rule
if ((f1 <= fr) && (fr < fn))
{
for (j = 0; j <= N - 1; j++)
{
for (i = 0; i <= N - 1; i++)
{
x[i, j] = y[i, j];
}
}
for (i = 0; i <= N - 1; i++)
{
x[i, N] = xr[i];
}
goto step0;
}
// Step 2. Expansion Rule
if (fr < f1)
{
for (j = 0; j <= N - 1; j++)
{
for (i = 0; i <= N - 1; i++)
{
x[i, j] = y[i, j];
}
}
if (fe < fr)
{
for (i = 0; i <= N - 1; i++)
{
x[i, N] = xe[i];
}
}
else
{
for (i = 0; i <= N - 1; i++)
{
x[i, N] = xr[i];
}
}
goto step0;
}
// Step 3. Outside contraction Rule
if ((fn <= fr) && (fr < fn1) && (foc <= fr))
{
for (j = 0; j <= N - 1; j++)
{
for (i = 0; i <= N - 1; i++)
{
x[i, j] = y[i, j];
}
}
for (i = 0; i <= N - 1; i++)
{
x[i, N] = xoc[i];
}
goto step0;
}
// Step 4. Inside contraction Rule
if ((fr >= fn1) && (fic < fn1))
{
for (j = 0; j <= N - 1; j++)
{
for (i = 0; i <= N - 1; i++)
{
x[i, j] = y[i, j];
}
}
for (i = 0; i <= N - 1; i++)
{
x[i, N] = xic[i];
}
goto step0;
}
// Step 5. Shrink Step
for (i = 0; i <= N - 1; i++)
{
x[i, 0] = y[i, 0];
}
for (i = 0; i <= N - 1; i++)
{
for (j = 1; j <= N; j++)
{
x[i, j] = 0.5 * (y[i, j] + x[i, 0]);
}
}
goto step0;
}
// Output component
double[] outvec = new Double[N + 2];
for (i = 0; i <= N - 1; i++)
{
outvec[i] = x1[i];
}
outvec[N] = f1;
outvec[N + 1] = NumIters;
return(outvec);
}
// Objective function for Elices prices ===========================================================================
public double f(double[] param, OFSetE ofsettingsE, OFSetH ofsettingsH, string choice)
{
ElicesAlgo EA = new ElicesAlgo();
HestonPrice HP = new HestonPrice();
double Error = 0.0;
if (choice == "Elices")
{
double S = ofsettingsE.opsettings.S;
double r = ofsettingsE.opsettings.r;
double q = ofsettingsE.opsettings.q;
int trap = ofsettingsE.opsettings.trap;
double[] MktIV = ofsettingsE.data.MktIV;
double[] MktPrice = ofsettingsE.data.MktPrice;
string PutCall = ofsettingsE.data.PutCall;
double[] K = ofsettingsE.data.K;
int NK = K.Length;
int t = ofsettingsE.t;
double[][] paramfixed = ofsettingsE.paramfixed;
double[] T = ofsettingsE.T;
double v0 = ofsettingsE.v0;
int NT = T.Length;
double[] lb = ofsettingsE.lb;
double[] ub = ofsettingsE.ub;
int LossFunction = ofsettingsE.LossFunction;
double[] X = ofsettingsE.X;
double[] W = ofsettingsE.W;
// Initialize the model price and model implied vol vectors, and the objective function value
double[] ModelPrice = new double[NK];
double[] ModelIV = new double[NK];
double Vega = 0.0;
double pi = Math.PI;
double kappaLB = lb[0]; double kappaUB = ub[0];
double thetaLB = lb[1]; double thetaUB = ub[1];
double sigmaLB = lb[2]; double sigmaUB = ub[2];
double rhoLB = lb[3]; double rhoUB = ub[3];
// Penalty for inadmissible parameter values
if ((param[0] <= kappaLB) || (param[1] <= thetaLB) || (param[2] <= sigmaLB) || (param[3] <= rhoLB) ||
(param[0] >= kappaUB) || (param[1] >= thetaUB) || (param[2] >= sigmaUB) || (param[3] >= rhoUB))
{
Error = 1.0e50;
}
else
{
for (int k = 0; k < NK - 1; k++)
{
if (t == 0)
{
ModelPrice[k] = EA.ElicesPrice(PutCall, S, K[k], T, r, q, param, v0, trap, X, W);
}
else
{
ModelPrice[k] = EA.ElicesPrice(PutCall, S, K[k], T, r, q, param, v0, trap, X, W, paramfixed);
}
switch (LossFunction)
{
case 1:
// MSE Loss Function
Error += Math.Pow(ModelPrice[k] - MktPrice[k], 2.0);
break;
case 2:
// RMSE Loss Function
Error += Math.Pow(ModelPrice[k] - MktPrice[k], 2.0) / MktPrice[k];
break;
case 3:
// IVRMSE Christoffersen, Heston, Jacobs proxy
double mat = T[NT - 1];
double d = (Math.Log(S / K[k]) + (r + MktIV[k] * MktIV[k] / 2.0) * mat) / MktIV[k] / Math.Sqrt(mat);
double NormPDF = Math.Exp(-0.5 * d * d) / Math.Sqrt(2.0 * pi);
Vega = S * NormPDF * Math.Sqrt(mat);
Error += Math.Pow(ModelPrice[k] - MktPrice[k], 2.0) / (Vega * Vega);
break;
}
}
Error /= Convert.ToDouble(NK);
}
}
else if (choice == "Heston")
// Objective function for Heston prices ===========================================================================
{
double[,] MktPrice = ofsettingsH.MktPrice;
double[,] MktIV = ofsettingsH.MktIV;
string PutCall = ofsettingsH.PutCall;
double[] K = ofsettingsH.K;
int NK = K.Length;
double[] T = ofsettingsH.T;
int NT = T.Length;
double[] lb = ofsettingsH.lb;
double[] ub = ofsettingsH.ub;
int LossFunction = ofsettingsH.LossFunction;
double[] X = ofsettingsH.X;
double[] W = ofsettingsH.W;
// Initialize the model price and model implied vol vectors, and the objective function value
double[,] ModelPrice = new double[NK, NT];
double[,] ModelIV = new double[NK, NT];
double Vega = 0.0;
double pi = Math.PI;
double kappaLB = lb[0]; double kappaUB = ub[0];
double thetaLB = lb[1]; double thetaUB = ub[1];
double sigmaLB = lb[2]; double sigmaUB = ub[2];
double rhoLB = lb[3]; double rhoUB = ub[3];
double v0LB = lb[4]; double v0UB = ub[4];
HParam param2 = new HParam();
param2.kappa = param[0];
param2.theta = param[1];
param2.sigma = param[2];
param2.rho = param[3];
param2.v0 = param[4];
// Penalty for inadmissible parameter values
if ((param[0] <= kappaLB) || (param[1] <= thetaLB) || (param[2] <= sigmaLB) || (param[3] <= rhoLB) || (param[4] <= v0LB) ||
(param[0] >= kappaUB) || (param[1] >= thetaUB) || (param[2] >= sigmaUB) || (param[3] >= rhoUB) || (param[4] >= v0UB))
{
Error = 1.0e50;
}
else
{
for (int t = 0; t <= NT - 1; t++)
{
for (int k = 0; k <= NK - 1; k++)
{
ModelPrice[k, t] = HP.HestonPriceGaussLaguerre(param2, ofsettingsH.opsettings, K[k], T[t], PutCall, X, W);
switch (LossFunction)
{
case 1:
// MSE Loss Function
Error += Math.Pow(ModelPrice[k, t] - MktPrice[t, k], 2.0);
break;
case 2:
// RMSE Loss Function
Error += Math.Pow(ModelPrice[k, t] - MktPrice[t, k], 2.0) / MktPrice[k, t];
break;
case 3:
// IVRMSE Christoffersen, Heston, Jacobs proxy
double S = ofsettingsH.opsettings.S;
double r = ofsettingsH.opsettings.r;
double q = ofsettingsH.opsettings.q;
double mat = T[NT - 1];
double d = (Math.Log(S / K[k]) + (r + MktIV[t, k] * MktIV[t, k] / 2.0) * mat) / MktIV[k, t] / Math.Sqrt(mat);
double NormPDF = Math.Exp(-0.5 * d * d) / Math.Sqrt(2.0 * pi);
Vega = S * NormPDF * Math.Sqrt(mat);
Error += Math.Pow(ModelPrice[k, t] - MktPrice[t, k], 2.0) / (Vega * Vega);
break;
}
}
}
Error /= Convert.ToDouble(NK * NT);
}
}
return(Error);
}