Convex regularization of local volatility estimation

DOI10.1142/S0219024917500066zbMATH Open1396.91711arXiv1308.2659MaRDI QIDQ2970321FDOQ2970321

Authors: A. De Cezaro, J. P. Zubelli, Vinicius Albani 

Publication date: 30 March 2017

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: We apply convex regularization techniques to the problem of calibrating the local volatility surface model of Dupire taking into account the practical requirement of discrete grids and noisy data. Such requirements are the consequence of bid and ask spreads, quantization of the quoted prices and lack of liquidity of option prices for strikes far way from the at the money level. We obtain convergence rates and results comparable to those obtained in the idealized continuous setting. Our results allow us to take into account separately the uncertainties due to the price noise and those due to discretization errors. Thus allowing better discretization levels both in the domain and in the image of the parameter to solution operator. We illustrate the results with simulated as well as real market data. We also validate the results by comparing the implied volatility prices of market data with the computed prices of the calibrated model. {10pt} oindent {�f Keywords:} Convex regularization, local volatility surfaces, regularization convergence rates, numerical methods for volatility calibration.

Full work available at URL: https://arxiv.org/abs/1308.2659

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zbMATH Keywords

regularization convergence ratesconvex regularizationlocal volatility surfacesnumerical methods for volatility calibration

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

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Cited In (9)

• Simultaneous identification of volatility and interest rate functions -- a two-parameter regularization approach
• Convex regularization of local volatility models from option prices: convergence analysis and rates
• COMPUTATION OF LOCAL VOLATILITIES FROM REGULARIZED DUPIRE EQUATIONS
• The calibration of stochastic local-volatility models: an inverse problem perspective
• Stable reconstruction of the volatility in a regime-switching local-volatility model
• A splitting strategy for the calibration of jump-diffusion models
• A connection between uniqueness of minimizers in Tikhonov-type regularization and Morozov-like discrepancy principles
• A Local Linear Least-Absolute-Deviations Estimator of Volatility
• Calibration of the local volatility in a trinomial tree using Tikhonov regularization

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