Control-theoretic framework for a quasi-Newton local volatility surface inversion
AbstractWe investigate in this paper the recovery of the local volatility surface in a parametric framework similar to that of Coleman, Li and Verma . The quality of a surface is assessed through a functional which is optimized; the specificity of the approach is to separate the optimization on the parametric space (performed with any suitable optimization algorithm) from the computation of the functional where we use an adjoint formulation similar to that of the optimal control; the procedure can thus incorporate information from any derivative contract compatible with the adjoint approach. The procedure was implemented and was shown to perform satisfactory on real-world data.
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Bibliographic InfoPaper provided by HAL in its series Post-Print with number hal-00298960.
Date of creation: 09 Feb 2009
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Publication status: Published - Presented, ICCMSE, 2008, Crete, Greece
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00298960/en/
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local volatility; calibration; volatility calibration; inversion; finance; financial derivatives; options;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-22 (All new papers)
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