hard · Quantitative Finance

In Heston model calibration, if the market shows a very steep smile for short-dated options that the model cannot fit, which addition is often made?

1. Incorporating jump-diffusion components into the stock price process.
2. Using a local volatility model instead of stochastic volatility.
3. Reducing the mean reversion speed κ to zero.
4. Increasing the Feller constant to 4.

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