Stochastic volatility
Quanto adjustments in the presence of stochastic volatility
Original headline:
Source: Risk magazine
It is well known that the quanto adjustment in the drift of the underlying has a significant impact on the prices of quanto options. Alexander Giese points out that an additional quanto adjustment in the...
Original headline:
Source: Risk magazine
Lorenzo Bergomi and Julien Guyon derive an expansion of the volatility surface of general stochastic volatility models at second order in volatility of volatility that is accurate for a wide range of strikes....
Original headline:
Source: Risk magazine
Local volatility was, for a long time, seen as being a universal panacea. However, cracks appeared and we have been forced to look elsewhere for a new framework. Philippe Henrotte, co-founder, partner...
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More Stochastic volatility articles
Perturbed Gaussian copula: introducing the skew effect in co-dependence...
Published online only
Source: Life & Pension Risk
Gaussian copula models are often used in the industry when single-asset information is quoted but little is known about their joint relation. These models may arise from correlated stochastic Brownian processes with deterministic volatility and correlation....
Being particular about calibration
Original headline:
Source: Risk magazine
Following previous work on the calibration of multi-factor local stochastic volatility models to market smiles, Julien Guyon and Pierre Henry-Labordère show how to calibrate exactly any such model. Their approach, based on McKean’s particle method,...
Right Laplace, right time
Original headline:
Source: Risk magazine
Calibrating implied volatility just got easier – thanks to a classical mathematical device with an illustrious history. Laurie Carver introduces this month’s technical articles by looking at how the Laplace transform can make volatility calibration...
Lifetime achievement award: John Hull
Original headline:
Source: Risk magazine
Ask any derivatives professional where they first learned about the subject and there’s a good chance they will tell you John Hull’s celebrated textbook, Options, futures and other derivatives. Heading for its eighth edition early this year, the...
A Libor market model with a stochastic basis
Original headline:
Source: Risk magazine
The advent of the financial crisis made the previously negligible bases between different overnight interest rates explode. Fabio Mercurio adapts the classic Brace-Gatarek-Musiela Libor market model to the multiple curve environment, and shows how to...
Sponsored statement: Controlling volatility to reduce uncertainty
Original headline:
Source: Risk magazine
The past two years have seen a reduction in risk appetite from investors, with clients reverting to less complex payoffs. However, while payoff variety has contracted, creation of new underlying indexes has proliferated. Most notably, a new breed of transparent...
The value of a variance swap – a question of interest
Published online only
Source: Risk magazine
Pricing equity variance swaps is well understood in the case of deterministic interest rates, but particularly for longer-dated swaps the stochastic nature of the rate cannot be ignored. Here, Per Hörfelt and Olaf Torné derive the fair strike when both...
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