Calibration of Local Stochastic Volatility Models to Market Smiles: A Monte-Carlo Approach
Risk Magazine, September 2009
16 Pages Posted: 24 Oct 2009 Last revised: 19 Aug 2011
Date Written: October 23, 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.
Keywords: Bergomi's model, $2$-factor log-normal, Malliavin's calculus, Markovian projection
JEL Classification: G13
Suggested Citation: Suggested Citation