Local and Stochastic Volatility Under Stochastic Interest Rates Using Mixture Models and the Multidimensional Fractional FFT
20 Pages Posted: 20 Sep 2016
Date Written: September 19, 2016
Stochastic volatility, local volatility and stochastic interest rates are three of the most important extensions to the standard Black-Scholes framework. Although much work has been done on models incorporating one or two of these extensions, very little has been done on the combination of all three. We show how to efficiently calibrate and simulate such a model by utilizing a mixture diffusion based approach, which takes advantage of the multidimensional fractional FFT.
Keywords: Mixture Models, Stochastic Interest Rates, Stochastic Volatility, Local Volatility, Multidimensional Fractional FFT
JEL Classification: G12, G13
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