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 - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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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: 2009-12-09
Note: View the original document on HAL open archive server: https://hal.science/hal-00338114v2
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Citations: View citations in EconPapers (3)

Published in The Journal of Computational Finance, 2009, 13 (2), pp.1--18

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

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