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arXiv · 1701.06001

Calibration of a Hybrid Local-Stochastic Volatility Stochastic Rates Model with a Control Variate Particle Method

Andrei Cozma·Matthieu Mariapragassam·Christoph Reisinger
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Abstract

We propose a novel and generic calibration technique for four-factor foreign-exchange hybrid local-stochastic volatility models with stochastic short rates. We build upon the particle method introduced by Guyon and Labord\`ere [Nonlinear Option Pricing, Chapter 11, Chapman and Hall, 2013] and combine it with new variance reduction techniques in order to accelerate convergence. We use control variates derived from a calibrated pure local volatility model, a two-factor Heston-type LSV model (both with deterministic rates), and the stochastic (CIR) short rates. The method can be applied to a large class of hybrid LSV models and is not restricted to our particular choice of the diffusion. The calibration procedure is performed on real-world market data for the EUR-USD currency pair and has a comparable run-time to the PDE calibration of a two-factor LSV model alone.

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Andrei Cozma, Matthieu Mariapragassam, Christoph Reisinger. 2017-01-21. Calibration of a Hybrid Local-Stochastic Volatility Stochastic Rates Model with a Control Variate Particle Method. https://arxiv.org/abs/1701.06001

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