TANGENT MODELS AS A MATHEMATICAL FRAMEWORK FOR DYNAMIC CALIBRATION
René Carmona () and
Sergey Nadtochiy ()
Additional contact information
René Carmona: Bendheim Center for Finance, ORFE, Princeton University, Princeton, NJ 08544, USA
Sergey Nadtochiy: Bendheim Center for Finance, ORFE, Princeton University, Princeton, NJ 08544, USA
International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 01, 107-135
Abstract:
Motivated by the desire to integrate repeated calibration procedures into a single dynamic market model, we introduce the notion of a "tangent model" in an abstract set up, and we show that this new mathematical paradigm accommodates all the recent attempts to study consistency and absence of arbitrage in market models. For the sake of illustration, we concentrate on the case when market quotes provide the prices of European call options for a specific set of strikes and maturities. While reviewing our recent results on dynamic local volatility and tangent Lévy models, we present a theory of tangent models unifying these two approaches and construct a new class of tangent Lévy models, which allows the underlying to have both continuous and pure jump components.
Keywords: Market models; Heath–Jarrow–Morton approach; implied volatility; local volatility; tangent Lévy models (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)
Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024911006280
Access to full text is restricted to subscribers
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:wsi:ijtafx:v:14:y:2011:i:01:n:s0219024911006280
Ordering information: This journal article can be ordered from
DOI: 10.1142/S0219024911006280
Access Statistics for this article
International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston
More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().