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

Abstract

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

Henry-Labordere, Pierre, Calibration of Local Stochastic Volatility Models to Market Smiles: A Monte-Carlo Approach (October 23, 2009). Risk Magazine, September 2009. Available at SSRN: https://ssrn.com/abstract=1493306

Pierre Henry-Labordere (Contact Author)

Société Générale - Paris, France ( email )

Paris-La Défense, Paris 92987
France

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