I start with predefined beta and alpha. Then I want to find rho and nu so the Sum of Squared Errors is minimized. By SSE I mean the difference between my model estimated volatilities and observed maarket volatilities. How can I do it in R? I have done following:
## difvol is a function of rho and nu, which is the sum of squared errors. nlm(difvol,0.01,0.01)
difvol is designed like that:
(first observed volatility - Black implied volatility)^2 + (second observed volatility - Black implied volatility)^2 ...
Black implied volatility has no values in my setup because I have no estimates for rho and nu.
However, the nlm code only returns one estimate and both I need to estimate nu and rho. What to do from here? How do I use nlm properly.
I know my difvol function could have been better but I don't want to change that.