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Calibration of a hybrid local-stochastic volatility stochastic rates model with a control variate particle method

Abstract:

We propose a novel and generic calibration technique for four-factor foreign-exchange hybrid local-stochastic volatility models (LSV) with stochastic short rates. We build upon the particle method introduced by Guyon and Henry-Labord`ere [Nonlinear Option Pricing, Chapter 11, Chapman and Hall, 2013] and combine it with new variance reduction techniques in order to accelerate convergence. We use control variates derived from: a calibrated pure local volatility model, a two-factor Heston-ty...

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Publication status:
Published
Peer review status:
Peer reviewed
Version:
Accepted Manuscript

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Publisher copy:
10.1137/17M1114570

Authors


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Institution:
University of Oxford
Division:
MPLS Division
Department:
Mathematical Institute
More by this author
Institution:
University of Oxford
Division:
MPLS Division
Department:
Mathematical Institute
More by this author
Institution:
University of Oxford
Division:
MPLS Division
Department:
Mathematical Institute
Oxford college:
St Catherines College
ORCID:
0000-0003-4027-5298
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Funding agency for:
Mariapragassam, M
More from this funder
Funding agency for:
Mariapragassam, M
Publisher:
Society for Industrial and Applied Mathematics Publisher's website
Journal:
SIAM Journal on Financial Mathematics Journal website
Volume:
10
Issue:
1
Pages:
181–213
Publication date:
2019-03-07
Acceptance date:
2018-12-08
DOI:
ISSN:
1945-497X
Pubs id:
pubs:951250
URN:
uri:9b18b46f-1998-4446-9811-3be11660b792
UUID:
uuid:9b18b46f-1998-4446-9811-3be11660b792
Local pid:
pubs:951250

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