Implied Calibration and Moments Asymptotics in Stochastic Volatility Jump Diffusion Models

32 Pages Posted: 2 Nov 2005 Last revised: 18 Nov 2008

See all articles by Stefano Galluccio

Stefano Galluccio

BNP Paribas Fixed Income

Yann Lecam

Evry University; French Treasury

Date Written: April 16, 2008

Abstract

In the context of arbitrage-free modelling of financial derivatives, we introduce a novel calibration technique for models in the affine-quadratic class for the purpose of over-the-counter option pricing and risk-management. In particular, we aim at calibrating a stochastic volatility jump diffusion model to the whole market implied volatility surface at any given time. We study the asymptotic behaviour of the moments of the underlying distribution and use this information to introduce and implement our calibration algorithm. We numerically show that the proposed approach is both statistically stable and accurate.

Keywords: Affine-quadratic models, Option pricing, Model calibration

JEL Classification: G12, G13

Suggested Citation

Galluccio, Stefano and Lecam, Yann, Implied Calibration and Moments Asymptotics in Stochastic Volatility Jump Diffusion Models (April 16, 2008). Available at SSRN: https://ssrn.com/abstract=831784 or http://dx.doi.org/10.2139/ssrn.831784

Stefano Galluccio (Contact Author)

BNP Paribas Fixed Income ( email )

10, Harewood Avenue
NW1 6AA London
United Kingdom

Yann Lecam

Evry University ( email )

Evry
France

French Treasury ( email )

Paris
France

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