Calibration of Local-Stochastic and Path-Dependent Volatility Models to Vanilla and No-Touch Options

Alan Bain, Matthieu Mariapragassam and Christoph Reisinger

Papers from arXiv.org

Abstract: We propose a generic calibration framework to both vanilla and no-touch options for a large class of continuous semi-martingale models. The method builds upon the forward partial integro-differential equation (PIDE) derived in Hambly et al. (2016), which allows fast computation of up-and-out call prices for the complete set of strikes, barriers and maturities. It also utilises a novel two-states particle method to estimate the Markovian projection of the variance onto the spot and running maximum. We detail a step-by-step procedure for a Heston-type local-stochastic volatility model with local vol-of-vol, as well as two path-dependent volatility models where the local volatility component depends on the running maximum. In numerical tests, we benchmark these new models against standard models for a set of EURUSD market data, all three models are seen to calibrate well within the market no-touch bid--ask.

Date: 2019-11
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1911.00877 Latest version (application/pdf)

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:arx:papers:1911.00877

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().