Calibration of a path-dependent volatility model: Empirical tests

Paolo Foschi and Andrea Pascucci

Computational Statistics & Data Analysis, 2009, vol. 53, issue 6, 2219-2235

Abstract: The Hobson and Rogers model for option pricing is considered. This stochastic volatility model preserves the completeness of the market and can potentially reproduce the observed smile and term structure patterns of implied volatility. A calibration procedure based on ad-hoc numerical schemes for hypoelliptic PDEs is proposed and used to quantitatively investigate the pricing performance of the model. Numerical results based on S&P500 option prices are discussed.

Date: 2009
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