Local and Stochastic Volatility Under Stochastic Interest Rates Using Mixture Models and the Multidimensional Fractional FFT

20 Pages Posted: 20 Sep 2016

See all articles by Mark S. Joshi

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Navin Ranasinghe

University of Melbourne - Centre for Actuarial Studies

Date Written: September 19, 2016

Abstract

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

Suggested Citation

Joshi, Mark and Ranasinghe, Navin, Local and Stochastic Volatility Under Stochastic Interest Rates Using Mixture Models and the Multidimensional Fractional FFT (September 19, 2016). Available at SSRN: https://ssrn.com/abstract=2840628 or http://dx.doi.org/10.2139/ssrn.2840628

Mark Joshi

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

Navin Ranasinghe (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

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