Calibration of Local Stochastic Volatility Models to Market Smiles: A Monte-Carlo Approach
Société Générale - Paris, France
October 23, 2009
Risk Magazine, September 2009
In this paper, we introduce a new technique for calibrating local volatility extensions of arbitrary multi-factor stochastic volatility models to market smiles. Although approximate, this technique is both fast and accurate. The procedure is illustrated with the Bergomi variance curve model and the $2$-factor log-normal model.
Number of Pages in PDF File: 16
Keywords: Bergomi's model, $2$-factor log-normal, Malliavin's calculus, Markovian projection
JEL Classification: G13Accepted Paper Series
Date posted: October 24, 2009 ; Last revised: August 19, 2011
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