Quantized calibration in local volatility

Pricing of a derivative should be fast and accurate, otherwise it cannot be calibrated efficiently. Here, Giorgia Callegaro, Lucio Fiorin and Martino Grasselli apply a fast quantization methodology, in a local volatility context, to the pricing of vanilla and barrier options that overcomes the numerical problems in existing methods



Quantization is a widely used tool in information theory, cluster analysis, pattern and speech recognition, numerical integration, data mining and, as in our case, numerical probability. The birth of optimal quantization dates back to the 1950s, when the necessity to optimise signal transmission, by appropriate discretisation procedures, arose.

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