ABSTRACT
In Chapter 3, the correlation of the Heston model is considered to be dynamic rather than constant assumed by the traditional Heston model. This chapter further explores this correlation and proposes a regression-based dynamic correlation Heston model. The correlation between volatility and the underlying asset price is estimated by three different regression models: simple regression model, polynomial regression model, and auto-regression model. Prediction performances of these models are compared in empirical tests.
