Finite Difference Based Calibration and Simulation

14 Pages Posted: 27 Oct 2010 Last revised: 30 Oct 2010

Jesper Andreasen

Danske Bank - Danske Markets

Brian Norsk Huge

Danske Bank

Date Written: October 20, 2010

Abstract

In the context of a stochastic local volatility model, we present a numerical solution scheme that achieves full (discrete) consistency between calibration, finite difference solution and Monte-Carlo simulation. The method is based on an ADI finite difference discretisation of the model.

Keywords: Stochastic local volatility, finite difference solution, calibration, simulation

JEL Classification: G12, G13

Suggested Citation

Andreasen, Jesper and Huge, Brian Norsk, Finite Difference Based Calibration and Simulation (October 20, 2010). Available at SSRN: https://ssrn.com/abstract=1697545 or http://dx.doi.org/10.2139/ssrn.1697545

Jesper Andreasen (Contact Author)

Danske Bank - Danske Markets ( email )

Holmens Kanal 2-12
DK-1092 Copenhagen K
Denmark

Brian Norsk Huge

Danske Bank ( email )

DK-1092 Copenhagen K
Denmark

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