Local volatility calibration during turbulent periods

Local volatility calibration during turbulent periods We propose a methodology to calibrate the local volatility function under a continuous time setting. For this purpose, we used the Markov chain approximation method built on the well-established idea of local consistency. The chain was designed to approximate jump–diffusions coupled with a local volatility function. We found that this method outperforms traditional numerical algorithms that require time discretization. Furthermore, we showed that a local volatility jump–diffusion model outperformed the in- and out-of-sample pricing that the market practitioners benchmark, namely the Practitioners Black–Scholes, in turbulent periods during which at-the-money implied volatilities have risen substantially. Hedging experiments show a moderate portfolio risk under the local volatility jump–diffusion case. As in previous literature concerning local volatility estimation, we represent the local volatility function using a space-time cubic spline. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Local volatility calibration during turbulent periods

Loading next page...
Springer US
Copyright © 2013 by Springer Science+Business Media New York
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
Publisher site
See Article on Publisher Site


  • Jump–diffusion processes: volatility smile fitting and numerical methods for option pricing
    Andersen, L; Andreasen, J
  • Using markov chains to estimate losses from a portfolio of mortgages
    Betancourt, L
  • News–good or bad–and its impact on volatility predictions over multiple horizons
    Chen, X; Ghysels, E
  • The importance of the loss function in option valuation
    Christoffersen, P; Jacobs, K
  • A joint analysis of the term structure of credit default swap spreads and the implied volatility surface
    Da Fonseca, J; Gottschalk, K
  • Riding on a smile
    Derman, E; Kani, I

You’re reading a free preview. Subscribe to read the entire article.

DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

Monthly Plan

  • Read unlimited articles
  • Personalized recommendations
  • No expiration
  • Print 20 pages per month
  • 20% off on PDF purchases
  • Organize your research
  • Get updates on your journals and topic searches


Start Free Trial

14-day Free Trial

Best Deal — 39% off

Annual Plan

  • All the features of the Professional Plan, but for 39% off!
  • Billed annually
  • No expiration
  • For the normal price of 10 articles elsewhere, you get one full year of unlimited access to articles.



billed annually
Start Free Trial

14-day Free Trial