Calibration of local-stochastic and path-dependent volatility models to vanilla and no-touch options

Alan Bain, Matthieu Mariapragassam and Christoph Reisinger

Journal of Computational Finance

Abstract: In this paper, we consider a large class of continuous semi-martingale models and propose a generic framework for their simultaneous calibration to vanilla and no-touch options. The method builds on the forward partial integro-differential equation (PIDE) derived by B. Hambly, M. Mariapragassam and C. Reisinger in their 2016 paper, “A forward equation for barrier options under the Brunick & Shreve Markovian projection†; this allows fast computation of up-and-out call prices for the complete set of strikes, barriers and maturities. We also use a novel two-state particle method to estimate the Markovian projection of the variance onto the spot and the running maximum. We detail a step-by-step procedure for a Heston-type local-stochastic volatility model with local volatility-of-volatility, as well as two path-dependent volatility models where the local volatility component depends on the running maximum.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-computational-fina ... and-no-touch-options (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ0:7815806

Access Statistics for this article

More articles in Journal of Computational Finance from Journal of Computational Finance
Bibliographic data for series maintained by Thomas Paine ().