Calibration of local volatility using the local and implied instantaneous variance

Gabriel Turinici ()
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Gabriel Turinici: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX

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Abstract: We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming (SQP) approach. The procedure performs well on benchmarks from the literature and on FOREX data.

Keywords: calibration; local volatility; implied volatility; Dupire formula; adjoint; instantaneous local variance; instantaneous implied variance; implied variance (search for similar items in EconPapers)
Date: 2009-02-09
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Published, Journal of Computational Finance, 2009, 0

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Persistent link: http://EconPapers.repec.org/RePEc:hal:journl:hal-00338114_v2

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