Calibration of the Bass Local Volatility model

Beatrice Acciaio, Antonio Marini and Gudmund Pammer

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Abstract: The Bass local volatility model introduced by Backhoff-Veraguas--Beiglb\"ock--Huesmann--K\"allblad is a Markov model perfectly calibrated to vanilla options at finitely many maturities, that approximates the Dupire local volatility model. Conze and Henry-Labord\`ere show that its calibration can be achieved by solving a fixed-point equation. In this paper we complement the analysis and show existence and uniqueness of the solution to this equation, and that the fixed-point iteration scheme converges at a linear rate.

Date: 2023-11
New Economics Papers: this item is included in nep-rmg
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