Portfolio Optimisation via the Heston Model Calibrated to Real Asset Data

Paper: arXiv 2302.01816

Authors: Jarosław Gruszka, Janusz Szwabiński

Abstract

The debate between active and passive investment strategies has been ongoing for many years and is far from being over. In this paper, we show that the choice of an optimal portfolio management strategy depends on an investment climate, which we measure via the parameters of the Heston model calibrated to the real stock market data. Depending on the values of those parameters, the passive strategy may namely outperform the active ones or vice versa. The method is tested on three stock market indices: S&P500, DAX and WIG20.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 5.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper applies stochastic volatility via the Heston model to the classic active vs. passive management debate across three global stock indices. While the underlying Heston calibration involves solid mathematical complexity, the empirical methodology and novelty are moderate, offering a practical framework but limited theoretical innovation.

Research Flowchart

  flowchart TD
    A[Research Question: Active vs. Passive Strategy Performance] --> B[Input Data: S&P500, DAX, WIG20 Indices]
    B --> C[Calibrate Heston Model to Real Asset Data]
    C --> D[Determine Investment Climate via Model Parameters]
    D --> E[Evaluate Strategy Performance Under Different Climates]
    E --> F[Outcome: Optimal Strategy Depends on Market Parameters]