Download or read book Local Volatility Calibration by Optimal Transport written by Ivan Guo and published by . This book was released on 2018 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt: The calibration of volatility models from observable option prices is a fundamental problem in quantitative finance. The most common approach among industry practitioners is based on the celebrated Dupire's formula, which requires the knowledge of vanilla option prices for a continuum of strikes and maturities that can only be obtained via some form of price interpolation. In this paper, we propose a new local volatility calibration technique using the theory of optimal transport. We formulate a time continuous martingale optimal transport problem, which seeks a martingale diffusion process that matches the known densities of an asset price at two different dates, while minimizing a chosen cost function. Inspired by the seminal work of Benamou and Brenier, we formulate the problem as a convex optimization problem, derive its dual formulation, and solve it numerically via an augmented Lagrangian method and the alternative direction method of multipliers (ADMM) algorithm. The solution effectively reconstructs the dynamic of the asset price between the two dates by recovering the optimal local volatility function, without requiring any time interpolation of the option prices.

Download or read book 2017 MATRIX Annals written by Jan de Gier and published by Springer. This book was released on 2019-03-13 with total page 691 pages. Available in PDF, EPUB and Kindle. Book excerpt: ​MATRIX is Australia’s international and residential mathematical research institute. It facilitates new collaborations and mathematical advances through intensive residential research programs, each 1-4 weeks in duration. This book is a scientific record of the eight programs held at MATRIX in its second year, 2017: - Hypergeometric Motives and Calabi–Yau Differential Equations - Computational Inverse Problems - Integrability in Low-Dimensional Quantum Systems - Elliptic Partial Differential Equations of Second Order: Celebrating 40 Years of Gilbarg and Trudinger’s Book - Combinatorics, Statistical Mechanics, and Conformal Field Theory - Mathematics of Risk - Tutte Centenary Retreat - Geometric R-Matrices: from Geometry to Probability The articles are grouped into peer-reviewed contributions and other contributions. The peer-reviewed articles present original results or reviews on a topic related to the MATRIX program; the remaining contributions are predominantly lecture notes or short articles based on talks or activities at MATRIX.

Download or read book Adjoint based Calibration of Local Volatility Models written by Andre Lörx and published by . This book was released on 2012 with total page 165 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stable Local Volatility Calibration Using Kernel Splines written by Cheng Wang and published by . This book was released on 2008 with total page 96 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis proposes an optimization formulation to ensure accuracy and stability in the local volatility function calibration. The unknown local volatility function is represented by kernel splines. The proposed optimization formulation minimizes calibration error and an L1 norm of the vector of coefficients for the kernel splines. The L1 norm regularization forces some coefficients to be zero at the termination of optimization. The complexity of local volatility function model is determined by the number of nonzero coefficients. Thus by using a regularization parameter, the proposed formulation balances the calibration accuracy with the model complexity. In the context of the support vector regression for function based on finite observations, this corresponds to balance the generalization error with the number of support vectors. In this thesis we also propose a trust region method to determine the coefficient vector in the proposed optimization formulation. In this algorithm, the main computation of each iteration is reduced to solving a standard trust region subproblem.

Download or read book Calibration of local volatility models and proper orthogonal decomposition reduced order modeling for stochastic volatility models written by Jian Geng and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Online Local Volatility Calibration by Convex Regularization written by Vinicius Albani and published by . This book was released on 2014 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: We address the inverse problem of local volatility surface calibration from market given option prices. We integrate the ever-increasing ow of option price information into the well-accepted local volatility model of Dupire. This leads to considering both the local volatility surfaces and their corresponding prices as indexed by the observed underlying stock price as time goes by in appropriate function spaces. The resulting parameter to data map is defined in appropriate Bochner-Sobolev spaces. Under this framework, we prove key regularity properties. This enable us to build a calibration technique that combines online methods with convex Tikhonov regularization tools. Such procedure is used to solve the inverse problem of local volatility identification. As a result, we prove convergence rates with respect to noise and a corresponding discrepancy-based choice for the regularization parameter. We conclude by illustrating the theoretical results by means of numerical tests.

Download or read book Local Volatility Calibration During Turbulent Periods written by Konstantinos Skindilias and published by . This book was released on 2014 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a methodology to calibrate the local volatility function under a continuous time setting. For this purpose, we used the Markov chain approximation method built on the well-established idea of local consistency. The chain was designed to approximate jump-diffusions coupled with a local volatility function. We found that this method outperforms traditional numerical algorithms that require time discretization. Furthermore, we showed that a local volatility jump-diffusion model outperformed the in- and out-of-sample pricing that the market practitioners benchmark, namely the Practitioners Black-Scholes, in turbulent periods during which at-the-money implied volatilities have risen substantially. As in previous literature concerning local volatility estimation, we represent the local volatility function using a space-time cubic spline.

Download or read book Smooth Calibration in Local Volatility with Jumps written by Gilles Boya and published by . This book was released on 2016 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: The aim of this article is to provide tools to calibrate a smooth local volatility surface in the presence of jumps. First we provide techniques to approximate the value of European options in a local volatility model with jumps, then we propose a quick and robust fixed point algorithm combined with this method to build smooth local volatility surfaces.

Download or read book Local Volatility written by Adil Reghai and published by . This book was released on 2015 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores a powerful calibration technique of local volatility models based on the fixed point algorithm. It proves to be more robust and generic than the standard Dupire Approach. We also show how to dramatically increase the performance of Monte Carlo simulations by means of techniques borrowed from quantum physics. In particular, we use operator theory combined with fast discrete random generation to construct fast, efficient and robust algorithms for production purposes. This contribution is an engineering piece of work.

Download or read book Calibrating the local volatility model written by and published by . This book was released on 2012 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Monte Carlo and Quasi Monte Carlo Methods written by Aicke Hinrichs and published by Springer Nature. This book was released on with total page 657 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Multiple Time Scales Stochastic Volatility Modeling Method in Stochastic Local Volatility Model Calibration written by Fan Wang and published by . This book was released on 2013 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis we study carefully the stochastic local volatility (SLV) model for pricing barrier options in foreign exchange or equity market. We first discuss the advantage and disadvantage of popular models such as stochastic volatility and local volatility that have been used for pricing the same products, then introduce the necessities to build a hybrid SLV model. We classified the calibration process of SLV model into two major parts according to parameters' different nature, and point out the slowness of the calibration procedure is mainly caused by solving the lever-age surface from Kolmogorov forward equation via the iteration method. Our major contribution is to apply the fast mean reversion volatility modeling technique and singular/regular perturbation analysis developed by Fouque, Papanicolaou, Sircar and Sølna in [24, 27, 26] to the forward equation, which gives a starting point which is proved to be close to the true solution, so that the iteration time is significantly reduced. Besides, we developed target functions specifically designed for processing exotic option quotes and give suitable numerical methods for each step of the calibration.

Download or read book Pricing and Calibration in Local Volatility Models Via Fast Quantization written by Giorgia Callegaro and published by . This book was released on 2017 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we propose the first calibration exercise based on quantization methods. Pricing and calibration are typically difficult tasks to accomplish: pricing should be fast and accurate, otherwise calibration cannot be performed efficiently. We apply in a local volatility context the recursive marginal quantization methodology to the pricing of vanilla and barrier options. A successful calibration of the Quadratic Normal Volatility model is performed in order to show the potentiality of the method in a concrete example, while a numerical exercise on barrier options shows that quantization overcomes Monte-Carlo methods.

Download or read book Calibration of Local Volatility Using the Local and Implied Instantaneous Variance written by Turinici M. Gabriel and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming (SQP) approach. The procedure performs well on benchmarks from the literature and on FOREX data.

Download or read book Local Volatility Models Enhanced with Jumps written by Hamza Guennoun and published by . This book was released on 2016 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study the calibration to market call prices C^{mkt}(t;K) of a local volatility model enhanced with jumps. Instead of giving an exact calibration condition on the local volatility, we introduce an approximate process S_t^ epsilon satisfying a well-defined nonlinear McKean SDE driven by a Cox process, such that E[(S_t^ epsilon - K) _ ] converges to C^{mkt}(t;K) as epsilon goes to 0 for all (t;K). This implies that the particle method, applied to the process S_t^ epsilon, which is used for the calibration of the local volatility, converges numerically. We illustrate the accuracy of our calibration algorithm with various numerical experiments. Finally, we extend this model by allowing jumps in the local volatility.

Download or read book Interest Rate Models Theory and Practice written by Damiano Brigo and published by Springer Science & Business Media. This book was released on 2007-09-26 with total page 1016 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.

Download or read book Model free Hedging written by Pierre Henry-Labordere and published by CRC Press. This book was released on 2017-05-25 with total page 115 pages. Available in PDF, EPUB and Kindle. Book excerpt: Model-free Hedging: A Martingale Optimal Transport Viewpoint focuses on the computation of model-independent bounds for exotic options consistent with market prices of liquid instruments such as Vanilla options. The author gives an overview of Martingale Optimal Transport, highlighting the differences between the optimal transport and its martingale counterpart. This topic is then discussed in the context of mathematical finance.