Questions tagged [calibration]

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18
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Local Stochastic Volatility - Break even levels

In Chapter 12 of his excellent book Stochastic Volatility Modeling, Lorenzo Bergomi discusses the topic of local-stochastic volatility models (LSV). As most of you are probably aware of, the idea is ...
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310 views

Dupire's calibration

I'm trying to implement a method for calibrating the local volatility model (Dupire's one). I'm working on the paper from Andreasen and Huge : Volatility interpolation (SSRN). Is this considered to be ...
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358 views

Libor Market Model with SABR Calibration

What is the industry practice in calibrating SABR Libor Market Model? Do you first calibrate the SABR model using market data and then implement the libor market model with the calibrated parameters? ...
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2k views

Calibration of Merton's jump diffusion model

Setting In my financial engineering project I'm working on a new calibration formalism for jump-diffusion models and in particular Merton's jump diffusion model. A jump diffusion process $\{X(t), t \...
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104 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 ...
4
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142 views

Volatility Parametrization Libor Market Model - Underspecified Model?

Does the volatility parametrization that I have chosen give an underspecified model? Which volatility parametrization in the Libor Market Model would suit the best for the particular case described ...
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96 views

Explicit expression for option prices in SABR?

I am trying to get a grip of the current state of research regarding option pricing in the SABR model. Am I correct in that, so far, there is no known general formula for the option price in the SABR ...
3
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105 views

Change of measure when calibrating real-world dynamics

If I want to simulate a process (say, a set of forward rates) under a real-world measure, can I use option prices / implied vols to calibrate some of the parameters and do I need to change the measure ...
3
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211 views

volatility term structure calibration

As is well known in order to calibrate an interest rate model (i.e. hull-white, LMM) i need to use the current market yield curve and volatility. But in the case I want to calibrate the model in a ...
3
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496 views

Ill-posed problem: Local volatility calibration. Regularization vs Smoothing

I have asked my question on Mathematics site of Stack Exchange but maybe I will get the answer rather here. I am working on inverse problem - calibration of local volatility (financial application). ...
3
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0answers
1k views

Heston Model Calibration

I've calibrated the Heston Model using options data and I was wondering if the parameters I've obtained are stable enough. Also, is Feller condition imposed, when calibrating the Heston Model, in the ...
3
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680 views

Equations for multicurve calibration with OIS discounting

I am trying to calibrate my forecast and discount curves using the multi-curve approach with OIS discounting. To do so, I have a implemented multivariate Newton-Raphson root finder. I am finding a bit ...
3
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376 views

Hull White 2 factors and non Markov interest rates

I am studying the calibration of the 2 factors Hull White model on Brigo and Mercurio's book. They point out that, using cap volatilities, the value of $\rho$ is almost minus one and this means that ...
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609 views

Code for quasi-Gaussian model (Cheyette model)

I'm looking into the quasi-Gaussian model with linear local volatility as explained by Andersen and Piterbarg (Interest Rate Modeling, Volume 2). I'm trying to calibrate this model and implement it. I ...
3
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240 views

Markov switching model estimation

We are testing Markov switching models to forecast risk regimes, similar to the paper by Kritzman, Page and Turkington. We find that in some cases the Baum-Welch algorithm converges very slowly or not ...
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0answers
51 views

Local v/s global calibration for a Bermudan Option (calibrate co-terminals vs entire matrix)

I am quite new to rates modeling and I have a question on the pros and cons of calibrating to larger set of vanilla instruments v/s calibrating to an exotic's 'natural' hedges. For example, I could ...
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198 views

Stochastic Volatility Models Real World Calibration

I am trying to find some research pertaining to the historical (or real world) calibration of stochastic volatility models. For example, in applications such as counterparty credit risk (IMM) or ...
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187 views

Bootstrapping and Curve Calibration Objective Function

I'm confused about the form of the objective function for some global curve calibration. It seems simple enough: minimized the squared loss of the price of the input instruments and the price ...
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79 views

Interest model calibration and binomial trees

Are there any good books for beginners on calibrating interest rate models and creating binomial trees based on these interest rate models and using them in pricing
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1answer
301 views

Autocall Calibration

I'm trying to price autocalls. In theory my pricing method is ok (I followed Bouzoubaa's book procedure) but I'm not sure I read anything on calibration of autocalls. Basically my question is what ...
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278 views

Calibration of real-world drift for PFE

It is well-known that for the calculation of potential future exposure (PFE), real-word probability measure should be used to scenario-generation and risk-neutral measure is used for revaluation; see ...
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0answers
1k views

Complete Algorithm of Calibration with Vasicek Model using Term-Structure Dynamics over Time

As there are so many different sccenarios about Vaicek Calibration but there has not been a clear example with data shown, I am totally Confused about how should I do it. so I am bringing the question ...
2
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123 views

Simulating t-distributed returns by calibrating degrees of freedom $\nu$ from variance or kurtosis

A slight twist (I hope) on the familiar problem of simulating log returns from a t-distribution. My two questions concern calibration to sample data. First, one can infer the degrees of freedom, $\nu$...
2
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0answers
445 views

Initial values for Heston Model calibration

I'm doing a Heston model in Matlab using simple Monte Carlo simulations (5.000 paths and 2 steps per day, simulating 360 days). When I try to calibrate the Heston parameters using fminsearch it takes ...
2
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0answers
432 views

How to calibrate volatility surface for Interest Rate Cap&Floor pricing

I'm using Black model to do interest rate Cap & Floor pricing. The volatility is determined by using the bootstrapping methodology. However, afterwards, how should I do the calibration, or ...
2
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0answers
140 views

How to compare market values with model values after calibration?

After calibration the G2++ model for interest (with swaption volatilities), I want to statistically test the quality of the calibration by comparing market to model values. What is the best way to ...
2
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0answers
128 views

Do some option pricing models allow for misspecification and what does it mean?

This is to some extent a theoretical question and maybe we can work together to produce some input and output. Diverse option pricing models are reported to be misspecified in various studies. One ...
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0answers
304 views

Dual curves and short rate calibration

When I calibrate a short rate model to market swaption vols, what curve am I getting when I plug in the calibrated parameters into the analytical formulae (assuming they exist for the model I'm ...
2
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0answers
165 views

What to do with linear regression or regression splines outside of the training range?

This is a cross-post from here In my question on a load forecast model using temperature data as covariates I was advised to use regression splines. This really seems to be a/the solution. Now I ...
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57 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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40 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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77 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 ...
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0answers
56 views

calibration of local volatility to

I'm looking to understand the practical details of calibrating local volatility to option prices for a range of different expiries using the Dupire local volatility equation. Would appreciate some ...
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0answers
76 views

MatLab code does not work for Heston model calibration

I am trying to calibrate Heston model on some data and I have the following code. Code is supposed, after it reads the data, to give back 5 parameters. However, I get an empty answer from MatLab. Does ...
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182 views

Heston Model Calibration with MatLab: model prices do not fall in the bid-ask range

I am currently implementing the MatLab code reported below for the calibration of Heston Model. The code seems fine and, by reading the paper where I took the code, I was able to calibrate and price ...
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154 views

Calibrate Geometric Brownian Motion of trading volume time series

Let's say I'm modeling the trading volume of a stock price (e.g. Apple Inc.) to follow a Geometric Brownian Motion and I want to estimate the parameters (i.e. drift and volatility) using historical ...
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299 views

1 Factor Hull And White Swaption Calibration

I'm trying to calibrate a Hull and White model with constant volatility, mean reversion and theta such that the model can reproduce the initial Term Structure. I'm using this python code adapted from &...
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0answers
78 views

Derivation of $u=e^{\sigma\sqrt{dt}}$ and $d=e^{-\sigma\sqrt{dt}}$

Anyone could provide me a proof of how, starting from $\frac{dS_T}{S_t}\sim \operatorname{N}(\mu dt,\sigma^2 dt)$ with $p:=\frac{e^{rdt}-d}{u-d}$, we can obtain the parameters $u$ and $d$ as from ...
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24 views

Hull & White 1F - What is the appropriate calibration portfolio for Libor indexed structured note?

I'm wondering what is the best swaptions or caps portfolio I could use to calibrate the two parameters of H&W 1F model for a structured note with optionality on Libor underlying. Let's suppose ...
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0answers
29 views

Goodness of Calibration Test

are there some tests which are usually performed in order to ensure that a calibration procedure is sound? That is, say you have a model depending on N parameters and one tries to fit them in order to ...
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0answers
91 views

Calibration of G2++ two factor interest rate model using Kalman filtering

I'm trying to use the Kalman filter to calibrate a G2++ interest rate model in R. I'm reading "Implementing interest rate models: A practical guide" by Park F.C. (2004) where he provides details on ...
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0answers
51 views

Calibration using only strike price

I have a binary option and want to calibrate it's BS pricing model. I only have a series of Strike Price vs the Option price, no knowledge on time to maturity, volatility, risk free rate or the ...
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0answers
84 views

Procedure of model calibration

Say that your end goal is to price an equity exotic derivative under both Heston and the local volatility models (Black Scholes model with vola dependent on strike and underlying level). Do the ...
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0answers
165 views

How to migrate Octave Levenberg-Marquardt algorithm to Accord.Net (C#)

I am trying to migrate Matlab (Octave) Levenberg-Marquardt algorithm to Accord.Net (C#) but struggling to match input parameters For example this simple example available in the documentation here: ...
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0answers
84 views

Effective duration and recalibration

I am calculating the effective duration of an interest rate instrument with optionality. I do the following calibrate an interest rate model to market data: discount curve and ATM swaption vols use ...
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0answers
37 views

amount of data - option pricer calibration

A practical question. When you calibrate an option pricer (whatever the model is), do you use data from several days or just one day (last trading day)? I noted some papers use data from one single ...
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0answers
124 views

Calibrating Heston paremeters based on market data for Implied Vol for Call options

Several questions have been asked in here regarding calibration in Heston yet I have not found what I have been looking for, so I will ask: I am looking at a Heston model: $$dS_t=\lambda \sqrt{v_t}...
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0answers
141 views

Multi objective optimization Swaption/Caplets joint Calibration

People suppose that we have a two asset type portfolio optimization (as Intrument Type 1 and 2). In the each portfolio refered by the instrument type there are 2 asset so we have four asset in total. ...
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63 views

Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?

Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) ...
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63 views

Parameters in Gueant, Lehalle, and Tapia Model

Currently I am working on a model to liquidate positions in equity markets with limit orders. I read Gueant, Lehalle, and Tapia's work on the subject, and find their model to be easy to understand. ...