The Smile Calibration Problem Solved

17 Pages Posted: 15 Jul 2011

See all articles by Julien Guyon

Julien Guyon

Ecole des Ponts ParisTech

Pierre Henry-Labordere

Qube Research & Technologies

Date Written: July 13, 2011

Abstract

Following previous work on calibration of multi-factor local stochastic volatility models to market smiles, we show how to calibrate exactly any such models. Our approach, based on McKean’s particle method, extends to hybrid models, for which we provide a Malliavin representation of the effective local volatility. We illustrate the efficiency of our algorithm on hybrid local stochastic volatility models.

Keywords: non linear SDEs, particle method, calibration, Malliavin calculus

JEL Classification: G13

Suggested Citation

Guyon, Julien and Henry-Labordere, Pierre, The Smile Calibration Problem Solved (July 13, 2011). Available at SSRN: https://ssrn.com/abstract=1885032 or http://dx.doi.org/10.2139/ssrn.1885032

Julien Guyon (Contact Author)

Ecole des Ponts ParisTech ( email )

Paris
France

Pierre Henry-Labordere

Qube Research & Technologies ( email )

Paris
France

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