Data driven recovery of local volatility surfaces

DOI10.3934/IPI.2017038zbMATH Open1368.45008arXiv1512.07660OpenAlexW2963109306MaRDI QIDQ2013860FDOQ2013860

Authors: Uri M. Ascher, Xu Yang, Vinicius Albani, J. P. Zubelli Edit this on Wikidata

Publication date: 9 August 2017

Published in: Inverse Problems and Imaging (Search for Journal in Brave)

Abstract: This paper examines issues of data completion and location uncertainty, popular in many practical PDE-based inverse problems, in the context of option calibration via recovery of local volatility surfaces. While real data is usually more accessible for this application than for many others, the data is often given only at a restricted set of locations. We show that attempts to "complete missing data" by approximation or interpolation, proposed in the literature, may produce results that are inferior to treating the data as scarce. Furthermore, model uncertainties may arise which translate to uncertainty in data locations, and we show how a model-based adjustment of the asset price may prove advantageous in such situations. We further compare a carefully calibrated Tikhonov-type regularization approach against a similarly adapted EnKF method, in an attempt to fine-tune the data assimilation process. The EnKF method offers reassurance as a different method for assessing the solution in a problem where information about the true solution is difficult to come by. However, additional advantage in the latter approach turns out to be limited in our context.

Full work available at URL: https://arxiv.org/abs/1512.07660

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zbMATH Keywords

data scienceinverse problemTikhonov-type regularizationensemble Kalman filterlocal volatility calibration

Mathematics Subject Classification ID

Inverse problems for integral equations (45Q05) Numerical methods for inverse problems for integral equations (65R32) Financial and insurance mathematics (aspects of mathematics education) (97M30)

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Cited In (5)

• Simultaneous identification of volatility and interest rate functions -- a two-parameter regularization approach
• Data-driven entropic spatially inhomogeneous evolutionary games
• The calibration of stochastic local-volatility models: an inverse problem perspective
• Adaptive regularisation for ensemble Kalman inversion
• A splitting strategy for the calibration of jump-diffusion models

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