Calibration of local volatility using the local and implied instantaneous variance

Turinici, Gabriel

Turinici, Gabriel (2009), Calibration of local volatility using the local and implied instantaneous variance, Journal of Computational Finance, 13, 2

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Article accepté pour publication ou publié

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http://hal.archives-ouvertes.fr/hal-00338114/en/

Date

2009

Nom de la revue

Journal of Computational Finance

Volume

Numéro

Éditeur

Incisive Financial Publishing ltd

Métadonnées

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Auteur(s)

Turinici, Gabriel

Résumé (EN)

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.

Mots-clés

implied volatility; local volatility; calibration; implied variance; instantaneous implied variance; instantaneous local variance; adjoint; Dupire formula