Deep calibration with random grids

Fabio Baschetti, Giacomo Bormetti and Pietro Rossi
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Fabio Baschetti: Scuola Normale Superiore
Giacomo Bormetti: University of Bologna
Pietro Rossi: University of Bologna

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Abstract: We propose a neural network-based approach to calibrating stochastic volatility models, which combines the pioneering grid approach by Horvath et al. (2021) with the pointwise two-stage calibration of Bayer et al. (2018) and Liu et al. (2019). Our methodology inherits robustness from the former while not suffering from the need for interpolation/extrapolation techniques, a clear advantage ensured by the pointwise approach. The crucial point to the entire procedure is the generation of implied volatility surfaces on random grids, which one dispenses to the network in the training phase. We support the validity of our calibration technique with several empirical and Monte Carlo experiments for the rough Bergomi and Heston models under a simple but effective parametrization of the forward variance curve. The approach paves the way for valuable applications in financial engineering - for instance, pricing under local stochastic volatility models - and extensions to the fast-growing field of path-dependent volatility models.

Date: 2023-06, Revised 2024-01
New Economics Papers: this item is included in nep-big, nep-cmp, nep-net and nep-rmg
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