Questions tagged [calibration]

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Can volatility assume negative values under multi-factor HJM framework?

I could find any reference restricting the sign of the volatilities in the multi-factor HJM framework. Can someone please confirm if $\sigma_i(t,T)$ can assume negative values for some $i,t$ and $T$? $...
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3 votes
0 answers
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Options skew: when is a perfect fit desirable?

I'm still troubled by a rather basic question, namely when is a perfect fit to the vanilla skew really necessary? I think if you are trading vanilla options and/or Europeans that can in theory be ...
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4 votes
1 answer
140 views

Calibration of Local or Stochastic Volatility Models to Prices vs Implied Volatilities

As the title suggests, what is the difference between calibrating an option pricing model (say the Heston model) to market option prices instead of computing their implied volatilities using Black-...
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2 votes
1 answer
268 views

Recovery Rates in CDS valuation

I am pricing CDS calibrating the default probabilities intensities using CDS spreads from Markit. Those spreads are given with a recovery. I have two questions regarding the recovery: In Option, ...
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How to calibrate short-rate model (Hull-White) using historical domestic IBOR curve without other derivative price? [duplicate]

I'm trying to calibrate Hull White model in VietNam market to value IRS, CSS products which are not publicly traded. dr(t)=(θ(t)−αr(t))dt+σ(t)dW(t) I only ...
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1 answer
167 views

Volatility surface

When fitting/calibrating a option model like heston to option data, what are some useful data handling to do? The basic thing is to remove all options with no trade/volume, but how many maturities ...
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0 answers
70 views

Are my fitted Vasicek model parameters market consistent or realistic?

In view of this question I asked some time ago, I tried to calibrate a Vasicek model to some cap volatilities, given as follows. I consider the maturities (in years) $$ 0.5,1,2,3,4,5,7,10,15,20 $$ and ...
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45 views

Using the SABR Model to Calibrate the Implied Volatility Smile/Surface of an American Option

If I already know the implied volatility smile/surface of an American option, can I directly use the SABR model to calibrate the smile/surface, or do I need to make certain adjustments first?
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1 vote
0 answers
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Interest Rate Calibration and Backtesting under Fed's raising rates 2022-2023

With the Fed raising interest rates so fast and so drastically, classical interest rate models such as the Black Karasinski (BK), Hull-White (HW), etc., may have trouble calibrating to current rate ...
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5 votes
2 answers
535 views

Pricing and hedging caps and floors on illiquid emerging markets

I'm tasked with the problem of setting up a cap/floor trading on an emerging market which doesn't have any interest rate derivatives traded yet besides plain vanilla interest rate swaps. We intend to ...
  • 636
1 vote
0 answers
72 views

ESSVI calibration problem in translating parameter bounds

I am trying to implement the calibration algorithm presented in the "ESSVI Implied Volatility Surface" white paper from Factset by Akhundzadeh et al. The eSSVI model includes 2 variables ...
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1 vote
0 answers
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Calibration period

I want to calibrate some model to market data. This could fx be Bates, Kou, Black-Scholes, etc. So, for each model we have a set of parameters which need to be estimated through calibration. Now, my ...
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2 votes
1 answer
95 views

Initial forward variance curve calibration

Let $V_t^{T_1, T_2}$ be the forward variance swap rate for the period $[T_1, T_2]$, seen from $t$ (see for instance Lorenzo Bergomi's Smile Dynamics II) and let $\xi_t^T = V_t^{T,T} = \frac{\partial}{\...
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2 votes
0 answers
69 views

How does one calibrate a Vasicek model to actual cap prices?

I am trying to calibrate a Vasicek model given by $$ dr(t) = k[\theta - r(t)] dt + \sigma dW(t), \quad r(0) = r_0 $$ where $k, \theta, \sigma, r_0 > 0$. I am using the book by Brigo and ...
3 votes
0 answers
62 views

Useful methods to avoid degenerate calibration? (Heston model in my case)

I have implemented a Levenberg-Marquardt(LM) based method to calibrate the Heston model against market data by minimizing a weighted $L^2$-norm of differences of market vs model prices. Pretty ...
1 vote
0 answers
81 views

Implied volatility from local volatility versus market implied volatility

Does the local volatility flattens the (existing not forward) skew faster than what we observed in the implied volatility surface? The process is: Get market implied volatilities Fit a IV model (i.e. ...
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1 vote
1 answer
149 views

A better calibration method available?

i'm facing a new and interesting task: We are calculating a time series of (hypothetical) behavioral portfolios, for which i need a few parameters to calculate the portfolio's weights in each asset. I'...
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0 answers
53 views

Double exponential parametrization of a correlation matrix

I'm implementing a LIBOR Market Model with stochastic volatility following this book and ran into a problem trying to parametrize the forward-forward and volatility-volatility correlation matrices ...
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9 votes
1 answer
596 views

The Holy Grail of Volatility Modelling: The SPX & VIX - Why?

I am currently researching a pre-print article by Julien Guyon & Jordan Lekeufack (2022): Volatility Is (Mostly) Path-Dependent. Their model is quite impressive in both its simplicity, as well as ...
3 votes
1 answer
148 views

Sabr Calibration not fitting the market volatility

I am trying to calibrate SABR but I do not fit the given volatility. ...
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0 votes
0 answers
52 views

Probability of touching barrier and stochastic interest rates

I am trying to figure out the impact of the stochastic interest rates on the price of barrier option. I was reading the book "FX Barrier Options" by Zareer Dadachanji and in the section ...
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2 votes
2 answers
202 views

Workaround for Hull-White short rate model in market without swaptions

Every time I search calibration methods in short-rate models such as Hull-White, I always find information on how to do it with swaptions market data. Yet, I can't find anything about how to do it in ...
2 votes
0 answers
89 views

Best way to extrapolate on implied volatility

I am doing some standard svd calibration to mark market implied vols in difference to a previous volatility surface. For longer term maturities where there is no market data, I am extrapolating ATM ...
0 votes
0 answers
93 views

Estimating market price of interest rate risk under CIR model

My goal is to find the market price of risk associated with the interest rate under the CIR model whose stochastic differential equation under the physical measure is given: \begin{eqnarray}\label{...
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2 votes
3 answers
468 views

Calibrate the SABR model to the implied volatility surface

I'm currently trying to calibrate the SABR model. The question I have is that when I consider papers and other websites I only come across cases where the SABR parameters are calibrated to the implied ...
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1 vote
1 answer
543 views

Pricing caps/floors on backward-looking USD SOFR with forward-looking LIBOR model

The payoff of a cap/floor is calculated as a payoff of constitutient caplets/floorlets. The SABR volatility model has the implied volatility approximations of Hagan et al. $$\sigma^f_{IV}\approx \...
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3 votes
1 answer
225 views

Calibration of a volatility smile model on a partial smile

I'm using a well-known SABR model in order to build an implied volatility surface of caps/floors on a very illiquid market which is entirely missing OTM quotes. What happens to SABR implied smile/...
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0 votes
0 answers
63 views

Italy Zero Coupon Yields

I am looking for historical data for Treasury bills and bond yields for Italy on a monthly or daily basis. Where can I get this data?
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0 votes
1 answer
377 views

Calibrating Heston model using implied volatilities

I'm trying to understand how the authers of a paper calibrated their model. We got data on European type options on the S&P500-index period from early 2005 to mid-2009. We have daily data on ...
1 vote
1 answer
176 views

Statistical metric to measure how well does the volatility surface fit the market

Suppose that I have a model for implied volatility surface and want to figure out required recalibration frequency based on historical quotes. Since I have a large range of strikes and tenors over a ...
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0 votes
1 answer
113 views

Double Heston model calibration in Christoffersen's paper uses 52 sets of market data (each set as of a different date). Why?

In the paper on Double Heston model (2009) from Peter Christoffersen, they say: "Our focus is on explaining why a two-factor model works better than a one-factor model for the purpose of option ...
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0 answers
90 views

Why would one need forward prices to perform derivatives pricing?

I am trying to understand the purpose of inputs the software of my company is using. Amongst others it needs calibration instruments, a model type, initial values of the respective underylings and a ...
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0 answers
72 views

Why calibrate vol based on consensus?

I am starting to work on building vol surfaces using implied vols on the short run mixed up with consensus vols ran through a whole bunch of interpolation/calibration/smoothing process. Although I ...
0 votes
0 answers
58 views

Option pricing when stock price follows binomial tree

Assume that the stock price is currently trading at $S_0$. It is known that the stock price follows a binomial tree, such that its price will be either $S_0e^{\theta_u}$ or $S_0e^{−\theta_d}$ over the ...
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1 vote
1 answer
205 views

Calibrate Local Volatility model to price quanto options

I have a Local Volatility model. I compute the LV surface $\sigma_{S}^{local}$ on vanilla option of $S$. Assume the vol of foreign exchange is constant and know, and the correlation equity/FX is known....
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0 votes
1 answer
431 views

Can't fit Bloomberg volatility smile with pysabr. What am I doing wrong?

I want to make sure that I can properly use SABR model on 1-period interest rate options, i.e. caplets, therefore I attempted to get lognormal volatilities for 4%, 6%, ATM, 8%, 10% strikes for 3Mx6M ...
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0 votes
1 answer
199 views

Should one calibrate SABR model on caps or caplets?

I want to build a volatility surface for caps on a 3M index implied from SABR model. I have a set of cap normal volatilities for a range of strikes (4%, 6%, 8%, 10% and ATM) and maturities (1, 2, 3, 4 ...
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1 vote
1 answer
69 views

In which scenario would we end up with more than one $\mathbb{Q}$ after calibrating an incomplete model?

Reading the literature I see that quite an effort is made to price derivatives in an incomplete setting. I see stuff like efficient hedging, indifference pricing, choosing $\mathbb{Q}$ by considering ...
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1 vote
0 answers
249 views

Calibrate 1-factor Gaussian HJM model on forward rates and ATM caps prices

I'm trying to solve the following problem as a part of the Interest Rate Models course The algorithm that I'm following is derive simple rates from the given forward rates via $L(0, T_i) = \frac{(1+\...
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1 vote
1 answer
166 views

Inverting the Black formula for Cap price to find Black implied volatility

I'm solving the following problem as a part of Interest Rate Models class on Coursera I'm having a hard time using nonlinear root solver to invert the Black formula for Cap price in order to obtain a ...
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4 votes
0 answers
218 views

Why calibrate volatility Models to volatility surfaces rather than underlying's historical price data?

I'm trying to grasp the rationale for calibrating stochastic volatility models (i.e. Heston model) to empirical IV data from market prices. Doesn't this assume that the options are fairly priced and ...
0 votes
1 answer
76 views

Why are implied parameters preferred over expectations of future implied parameters?

For example, when we price options on assets under the Heston model, we often compute the volatility of the volatility of the price of those assets implied by the market at time $t=0$ using the market ...
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1 vote
0 answers
72 views

Question on model recalibration upon a spot shift scenario analysis

I am given a plot of the fair value of a complex derivative against a scenario spot shift for a range odd possible shifts (-40% to 40%). Let us say the pricing model is a local vol model. I am unable ...
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1 vote
1 answer
126 views

Why should future short rates tend towards the current term structure of interest rates?

I'm currently looking at the Hull-White model reproduced below: $$\mathrm{d}r = \lambda(\theta(t)-r)\mathrm{d}t + \sigma\mathrm{d}W(t)\text{.}\tag{1}$$ I have a simplistic understanding of the model. ...
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0 votes
1 answer
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When are parameters calibrated using one option type applicable to price other option types on the same underlying?

I am coding up some basic models to show prospective employers, but I am forced to guess "what is done in practice" since I don't yet work in the industry. I am implementing various ...
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3 votes
1 answer
834 views

Risk Neutral Valuation, Drifts and Calibration

Lets consider a pricing model like Vasicek. Apparently, if you calibrate a derivatives pricing model to market prices this gives you risk neutral parameters. Its not clear to me as to WHY this will ...
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1 vote
1 answer
1k views

What is the definition of "co-terminal swaptions"? why they are important in the calibration process?

could anyone help me understand the definition of "co-terminal" swaptions? What are they? Can you provide an example to illustrate? And why such instruments are important in model ...
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1 vote
1 answer
189 views

Calibration of Heston model with stochastic short rate

I have following Heston model with stochastic short rate: \begin{eqnarray*}dS\left(t\right)&=&r\left(t\right)S\left(t\right)dt+\nu\left(t\right)S\left(t\right)dW^{S}\left(t\right)\\dr\left(t\...
1 vote
0 answers
129 views

Can you calibrate the Heston model using stock price trajectories?

I'm interested in calibrating the Heston model so I was reading about it online. All procedures I could find was using market prices for European call options and using the (semi-)closed-form ...
1 vote
2 answers
746 views

Calibrate Hull-white one factor model with swaption in analytical formula

I've been trying to calibrate Hull-white one factor model with swaption but I have a trouble making closed form solution of swaption Below is the part of paper I've been referencing to https://people....
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