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Calibration to FX Triangles of the 4/2 Model Under the Benchmark Approach

Author

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  • Alessandro Gnoatto

    (Department of Economics (University of Verona))

  • Martino Grasselli

    (Dipartimento di Matematica - Università degli Studi di Padova)

  • Eckhard Platen

    (University of Technology, Sydney)

Abstract

We calibrate a novel multifactor stochastic volatility model that includes as special cases the Heston-based model of De Col et al. (2013) and the 3/2-based model of Baldeaux et al. (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, 2021. "Calibration to FX Triangles of the 4/2 Model Under the Benchmark Approach," Working Papers 06/2021, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:06/2021
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    References listed on IDEAS

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    9. Alessandro Gnoatto, 2017. "Coherent Foreign Exchange Market Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-29, February.
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    17. De Col, Alvise & Gnoatto, Alessandro & Grasselli, Martino, 2013. "Smiles all around: FX joint calibration in a multi-Heston model," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3799-3818.
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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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