Calibration of local volatility using the local and implied instantaneous variance
Turinici, Gabriel (2009), Calibration of local volatility using the local and implied instantaneous variance, Journal of Computational Finance, 13, 2
TypeArticle accepté pour publication ou publié
External document linkhttp://hal.archives-ouvertes.fr/hal-00338114/en/
Journal nameJournal of Computational Finance
Incisive Financial Publishing ltd
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Abstract (EN)We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming (SQP) approach. The procedure performs well on benchmarks from the literature and on FOREX data.
Subjects / Keywordsimplied volatility; local volatility; calibration; implied variance; instantaneous implied variance; instantaneous local variance; adjoint; Dupire formula
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