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Calibration to FX triangles of the 4/2 model under the benchmark approach

Author

Listed:
  • Alessandro Gnoatto

    (University of Verona)

  • Martino Grasselli

    (Università degli Studi di Padova
    Léonard de Vinci Pôle Universitaire)

  • Eckhard Platen

    (University of Technology Sydney
    University of Cape Town)

Abstract

We calibrate a novel multifactor stochastic volatility model that includes as special cases the Heston-based model of De Col et al. (J Bank Finance 37(10):3799–3818, 2013) and the 3/2-based model of Baldeaux et al. (J Bank Finance 53:34–48, 2015). Using a dataset on vanilla option quotes in a triangle of currencies, we find that the risk neutral approach typically fails for the calibrated model, in line with the results of Baldeaux et al. (2015).

Suggested Citation

  • Alessandro Gnoatto & Martino Grasselli & Eckhard Platen, 2022. "Calibration to FX triangles of the 4/2 model under the benchmark approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 1-34, June.
    • Handle: RePEc:spr:decfin:v:45:y:2022:i:1:d:10.1007_s10203-021-00330-1
    DOI: 10.1007/s10203-021-00330-1
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    Cited by:

    1. Claudio Fontana & Alessandro Gnoatto & Guillaume Szulda, 2021. "CBI-time-changed L\'evy processes for multi-currency modeling," Papers 2112.02440, arXiv.org, revised Jul 2022.
    2. Yumo Zhang, 2023. "Utility maximization in a stochastic affine interest rate and CIR risk premium framework: a BSDE approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 46(1), pages 97-128, June.

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    More about this item

    Keywords

    Benchmark approach; Fourier inversion; Stochastic volatility; Forex;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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