EconPapers    
Economics at your fingertips  
 

On full calibration of hybrid local volatility and regime‐switching models

Xin‐Jiang He and Song‐Ping Zhu

Journal of Futures Markets, 2018, vol. 38, issue 5, 586-606

Abstract: Calibrating local regime‐switching models is a challenging problem, especially when the volatility functions are assumed to depend on both of the underlying price and time. In this paper, the inverse problem of determining local volatility functions is firstly established and then solved through the Tikhonov regularization to obtain the optimal solution, which is achieved iteratively through a newly designed numerical algorithm. While our numerical tests with artificial data show that our algorithm can provide quite accurate and stable results, its performance with the involvement of real market data have been further demonstrated using options written on the S&P 500 index.

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1002/fut.21901

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:wly:jfutmk:v:38:y:2018:i:5:p:586-606

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2020-09-17
Handle: RePEc:wly:jfutmk:v:38:y:2018:i:5:p:586-606