Calibration of Spread Option Pricing with Liquidity Impact

Shuming Zhang and Traian A. Pirvu ()
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Traian A. Pirvu: McMaster University, Department of Mathematics and Statistics

A chapter in Advanced Data Analytics, Machine Learning and AI in Business, 2026, pp 569-582 from Springer

Abstract: Abstract This work implements a calibration procedure for pricing spread options with liquidity risk. The pricing methodology developed in Pirvu and Zhang (2024) is employed. The calibration procedure is based on nonlinear regression. This method provides close estimations of model parameters using synthetic market data. Our calibration results reveal that more volatile market data leads to higher liquidity impact parameters. A detailed examination and visualization of the performance of the nonlinear regression estimation method is performed. On the practical side, the liquidity value adjustment (LVA) of our model is computed for spread options across different combinations of strike price and time to maturity.

Keywords: Derivatives; risk management; and speculations; liquidity risk; calibration (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnopch:978-3-032-23493-3_34

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DOI: 10.1007/978-3-032-23493-3_34

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