Data driven recovery of local volatility surfaces
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Publication:2013860
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.
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Cites work
- scientific article; zbMATH DE number 1548491 (Why is no real title available?)
- scientific article; zbMATH DE number 936298 (Why is no real title available?)
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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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