A new class of multidimensional Wishart-based hybrid models

Gaetano La Bua and Daniele Marazzina ()
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Gaetano La Bua: Politecnico di Milano
Daniele Marazzina: Politecnico di Milano

Decisions in Economics and Finance, 2022, vol. 45, issue 1, No 8, 209-239

Abstract: Abstract In this article, we present a new class of pricing models that extend the application of Wishart processes to the so-called stochastic local volatility (or hybrid) pricing paradigm. This approach combines the advantages of local and stochastic volatility models. Despite the growing interest on the topic, however, it seems that no particular attention has been paid to the use of multidimensional specifications for the stochastic volatility component. Our work tries to fill the gap: we introduce two hybrid models in which the stochastic volatility dynamics is described by means of a Wishart process. The proposed parametrizations not only preserve the desirable features of existing Wishart-based models but significantly enhance the ability of reproducing market prices of vanilla options.

Keywords: Wishart process; Local volatility; Hybrid model; Calibration; Multi-assets (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10203-021-00357-4

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