Equity modelling with local stochastic volatility and stochastic discrete dividends

SocGen quants calibrate local stochastic volatility models with stochastic dividends

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In this article, Pierre Henry-Labordère and Hamza Guennoun extend previous work on the calibration of local stochastic volatility models with discrete dividends by incorporating stochastic dividends. An exact calibration method is obtained using the particle algorithm

Modelling (discrete) dividends is a crucial issue. Equity products such as knockout dividend swaps for which the payoff is of the form:

  1mint∈[T1,T2]⁡St<B⁢F⁢(∑ti∈[T1,T2]Dti)  

require us to h