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Calibration of the SABR Model in Illiquid Markets

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  • Graeme West
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    Abstract

    Recently the SABR model has been developed to manage the option smile which is observed in derivatives markets. Typically, calibration of such models is straightforward as there is adequate data available for robust extraction of the parameters required asinputs to the model. The paper considers calibration of the model in situations where input data is very sparse. Although this will require some creative decision making, the algorithms developed here are remarkably robust and can be used confidently for mark to market and hedging of option portfolios.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860500148672
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 12 (2005)
    Issue (Month): 4 ()
    Pages: 371-385

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    Handle: RePEc:taf:apmtfi:v:12:y:2005:i:4:p:371-385

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: SABR model; equity derivatives; volatility skew calibration; illiquid markets;

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    Cited by:
    1. Kenichiro Shiraya & Akihiko Takahashi, 2010. "Pricing Average Options on Commodities," CIRJE F-Series CIRJE-F-747, CIRJE, Faculty of Economics, University of Tokyo.
    2. Qasim Nasar-Ullah, 2013. "A parallel implementation of a derivative pricing model incorporating SABR calibration and probability lookup tables," Papers 1301.3118, arXiv.org.
    3. Kotzé, Antonie & Labuschagne, Coenraad C.A. & Nair, Merell L. & Padayachi, Nadine, 2013. "Arbitrage-free implied volatility surfaces for options on single stock futures," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 380-399.
    4. Kenichiro Shiraya & Akihiko Takahashi, 2009. "Pricing Average Options on Commodities," CARF F-Series CARF-F-177, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Feb 2012.
    5. Fernández, J.L. & Ferreiro, A.M. & García-Rodríguez, J.A. & Leitao, A. & López-Salas, J.G. & Vázquez, C., 2013. "Static and dynamic SABR stochastic volatility models: Calibration and option pricing using GPUs," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 55-75.

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