Calibration of local volatility using the local and implied instantaneous variance
We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming (SQP) approach. The procedure performs well on benchmarks from the literature and on FOREX data.
|Date of creation:||09 Dec 2009|
|Date of revision:|
|Publication status:||Published, Journal of Computational Finance, 2009, 13, 2, 1--18|
|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00338114|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
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- Lishang Jiang & Qihong Chen & Lijun Wang & Jin Zhang, 2003. "A new well-posed algorithm to recover implied local volatility," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 451-457.
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