Calibration to FX triangles of the 4/2 model under the benchmark approach

Alessandro Gnoatto, Martino Grasselli () and Eckhard Platen ()
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Martino Grasselli: Università degli Studi di Padova

Decisions in Economics and Finance, 2022, vol. 45, issue 1, No 1, 34 pages

Abstract: Abstract We calibrate a novel multifactor stochastic volatility model that includes as special cases the Heston-based model of De Col et al. (J Bank Finance 37(10):3799–3818, 2013) and the 3/2-based model of Baldeaux et al. (J Bank Finance 53:34–48, 2015). Using a dataset on vanilla option quotes in a triangle of currencies, we find that the risk neutral approach typically fails for the calibrated model, in line with the results of Baldeaux et al. (2015).

Keywords: Benchmark approach; Fourier inversion; Stochastic volatility; Forex (search for similar items in EconPapers)
JEL-codes: C6 C63 G1 G12 G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10203-021-00330-1

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