A Stochastic Local Volatility Calibration
26 Pages Posted: 29 Jun 2020
Date Written: May 29, 2020
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: Suggested Citation