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Stochastic Knothe-Rosenblatt: Light-speed Calibration of Stochastic Local Volatility Models

Author

Listed:
  • Mathias Beiglbock
  • Manuel Hasenbichler
  • Gudmund Pammer

Abstract

European option smiles determine the risk-neutral marginal laws of an asset, but not their intertemporal coupling, which is decisive for many applications. The Bass martingale construction selects, among all calibrated martingales, the one closest to Bachelier dynamics; it permits fast calibration at discrete maturities and recovers the Dupire local-volatility (LV) model as the maturity grid is refined. This article develops a modular calibration overlay for existing stochastic and path-dependent volatility models. We sequentially construct a martingale that matches all prescribed marginals exactly while remaining as close as possible, in an adapted Knothe-Rosenblatt sense, to the reference dynamics. As with the Bass LV model, each calibration step is amenable to an efficient Martingale Sinkhorn algorithm. We develop the theoretical foundations, numerical implementation and consider convergence to the SLV model. We also benchmark the method for Heston and Bergomi finite-factor path-dependent volatility dynamics and develop the multi-asset extension.

Suggested Citation

  • Mathias Beiglbock & Manuel Hasenbichler & Gudmund Pammer, 2026. "Stochastic Knothe-Rosenblatt: Light-speed Calibration of Stochastic Local Volatility Models," Papers 2609.39256, arXiv.org, revised Oct 2026.
    • Handle: RePEc:arx:papers:2609.39256
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    References listed on IDEAS

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    8. Guillaume Carlier & Alfred Galichon & Filippo Santambrogio, 2010. "From Knothe's transport to Brenier's map and a continuation method for optimal transport," SciencePo Working papers hal-01023796, HAL.
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