Calibration of local volatility surfaces with uncertain asset price: an EnKF-EnKF approach

• DOI: 10.22533/at.ed.4052027101

• Palavras-chave: Local volatility. Asset price. Ensemble Kalman filter. Tikhonov regularization.

• Keywords: Local volatility. Asset price. Ensemble Kalman filter. Tikhonov regularization.

• Abstract:

  In the problem of calibrating local volatility surface, the importance of considering the uncertainty of asset prices in the local volatility was firstly proposed in the work of Albani, et al (2017). The authors generalized the local volatility model by assuming that the asset prices are not certain, but not far away from the mean of the prices of the day. By applying a two-stage model, which is to calibrate the local volatility first with a given asset price, then to correct the asset price with the estimated local volatility, and so on so forth, a better local volatility and asset price can be obtained in the end of the algorithm. In both stages, they used Tikhonov regularization model. However, in this work, we propose an EnKF-EnKF model to calibrate the local volatility model with uncertainty asset prices. The results can be compared with the Tikhonov type of models.  

• Número de páginas: 7