Local Volatility Calibration Using An Adjoint Proxy

Gabriel Turinici ()
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Gabriel Turinici: CEREMADE, Université Paris Dauphine

Review of Economic and Business Studies, 2008, issue 2, 93-105

Abstract: We document the calibration of the local volatility in a framework similar to Coleman, Li and Verma. The quality of a surface is assessed through a functional to be optimized; the specificity of the approach is to separate the optimization (performed with any suitable optimization algorithm) from the computation of the functional where we use an adjoint (as in L. Jiang et. al.) to obtain an approximation; moreover our main calibration variable is the implied volatility (the procedure can also accommodate the Greeks). The procedure performs well on benchmarks from the literature and on FOREX data.

Keywords: calibration; local volatility; implied volatility; Dupire formula; adjoint (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:aic:revebs:y:2008:i:2:turinicig

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