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A new class of multidimensional Wishart-based hybrid models

Author

Listed:
  • Gaetano La Bua

    (Politecnico di Milano)

  • Daniele Marazzina

    (Politecnico di Milano)

Abstract

In this article, we present a new class of pricing models that extend the application of Wishart processes to the so-called stochastic local volatility (or hybrid) pricing paradigm. This approach combines the advantages of local and stochastic volatility models. Despite the growing interest on the topic, however, it seems that no particular attention has been paid to the use of multidimensional specifications for the stochastic volatility component. Our work tries to fill the gap: we introduce two hybrid models in which the stochastic volatility dynamics is described by means of a Wishart process. The proposed parametrizations not only preserve the desirable features of existing Wishart-based models but significantly enhance the ability of reproducing market prices of vanilla options.

Suggested Citation

  • Gaetano La Bua & Daniele Marazzina, 2022. "A new class of multidimensional Wishart-based hybrid models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 209-239, June.
    • Handle: RePEc:spr:decfin:v:45:y:2022:i:1:d:10.1007_s10203-021-00357-4
    DOI: 10.1007/s10203-021-00357-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Wishart process; Local volatility; Hybrid model; Calibration; Multi-assets;
    All these keywords.

    JEL classification:

    • 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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