2017/01/21 by Andrei Cozma, Cozma, Andrei, Matthieu Mariapragassam +3 · 1 citation
Economics, Econometrics and Finance · #FOS: Economics and business #Financial Risk and Volatility Modeling #Mathematical Finance (q-fin.MF) #Monetary Policy and Economic Impact #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1701.06001
openalex publication_date 2017/01/21 · openalex created_date 2022/08/14 · openalex updated_date 2026/07/28
We propose a novel and generic calibration technique for four-factor\nforeign-exchange hybrid local-stochastic volatility models with stochastic\nshort rates. We build upon the particle method introduced by Guyon and\nLabord `ere [Nonlinear Option Pricing, Chapter 11, Chapman and Hall, 2013] and\ncombine it with new variance reduction techniques in order to accelerate\nconvergence. We use control variates derived from a calibrated pure local\nvolatility model, a two-factor Heston-type LSV model (both with deterministic\nrates), and the stochastic (CIR) short rates. The method can be applied to a\nlarge class of hybrid LSV models and is not restricted to our particular choice\nof the diffusion. The calibration procedure is performed on real-world market\ndata for the EUR-USD currency pair and has a comparable run-time to the PDE\ncalibration of a two-factor LSV model alone.\n