Calibrating Option Pricing Models with Heuristics

Gilli, Manfred; Schumann, Enrico

Calibrating Option Pricing Models with Heuristics

NATURAL COMPUTING IN COMPUTATIONAL FINANCE, Anthony Brabazon, Michael O'Neill, Dietmar Maringer, eds., Vol. 4, Springer, 2011

39 Pages Posted: 8 Mar 2010 Last revised: 30 Dec 2013

See all articles by Manfred Gilli

Manfred Gilli

University of Geneva - Research Center for Statistics; Swiss Finance Institute

Enrico Schumann

Independent

Date Written: December 27, 2013

Abstract

Calibrating option pricing models to market prices often leads to optimisation problems to which standard methods (like such based on gradients) cannot be applied. We investigate two models: Heston’s stochastic volatility model, and Bates’s model which also includes jumps. We discuss how to price options under these models, and how to calibrate the parameters of the models with heuristic techniques. Sample Matlab code is provided.

Keywords: Option Pricing, Calibration of Option Pricing Models, Differential Evolution, Particle Swarm Optimisation, Heston Model, Bates Model, Matlab

JEL Classification: C61, C63, G13

Suggested Citation: Suggested Citation

Gilli, Manfred and Schumann, Enrico, Calibrating Option Pricing Models with Heuristics (December 27, 2013). NATURAL COMPUTING IN COMPUTATIONAL FINANCE, Anthony Brabazon, Michael O'Neill, Dietmar Maringer, eds., Vol. 4, Springer, 2011, Available at SSRN: https://ssrn.com/abstract=1566975