A splitting strategy for the calibration of jump-diffusion models (Q784736)

Using a forward Dupire-type partial integro-differential equation for the option prices to produce a parameter-to-solution map, the authors present a detailed analysis and implementation of a splitting strategy to identify simultaneously the local volatility surface and the jump-size distribution from quoted European prices. The underlying model consists of a jump-diffusion driven asset with time- and price-dependent volatility. The ill-posed inverse problem for this map is then solved by means of a Tikhonov-type convex regularisation. The proofs of convergence and stability of the algorithm are provided together with numerical examples that illustrate the robustness of the method both for synthetic and real data.