The Smile Calibration Problem Solved
17 Pages Posted: 15 Jul 2011
Date Written: July 13, 2011
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
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