A Stochastic Local Volatility Calibration

26 Pages Posted: 29 Jun 2020

Date Written: May 29, 2020

Abstract

Stochastic Local Volatility models are suitable for exotic portfolio management. Here we calibrate the Madan-Qian-Ren model enhanced with a correlation between the forex spot rate and the stochastic volatility.

For the numerical resolution, we use a two-dimensional finite differences scheme with two different ADI methods (Douglas-Rachford and Hundsdorfer-Verwer), and show that the selection of correct boundary conditions is a key factor for a robust calibration.

Keywords: Forex Stochastic Local Volatility, Ornstein Uhlenbeck, Fx Smile, SVI volatility, ADI schemes

JEL Classification: G13

Suggested Citation

Garrivier, Alexandre, A Stochastic Local Volatility Calibration (May 29, 2020). Available at SSRN: https://ssrn.com/abstract=3617929 or http://dx.doi.org/10.2139/ssrn.3617929

Alexandre Garrivier (Contact Author)

Acanthus Solutions ( email )

France

HOME PAGE: http://www.acanthussol.com

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