COHERENT FOREIGN EXCHANGE MARKET MODELS

Alessandro Gnoatto

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 01, 1-29

Abstract: A model describing the dynamics of a foreign exchange (FX) rate should preserve the same level of analytical tractability when the inverted FX process is considered. We show that affine stochastic volatility models satisfy such a requirement. Such a finding allows us to use affine stochastic volatility models as a building block for FX dynamics that are functionally-invariant with respect to the construction of suitable products/ratios of rates, thus generalizing the model of [A. De Col, A. Gnoatto & M. Grasselli (2013) Smiles all around: FX joint calibration in a multi-Heston model, Journal of Banking and Finance 37 (10), 3799–3818.].

Keywords: FX options; foreign-domestic parity; affine processes (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024917500078

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