Journal of Computational Finance

A technique for calibrating derivative security pricing models: numerical solution of an inverse problem

Ronald Lagnado, Stanley Osher


A technique is presented for calibrating derivative security pricing models with respect to observed market prices. This technique can be applied in a very general multifactor setting where model parameters such as volatilities and correlations are allowed to be functions of the underlying state variables. These functions are estimated from price observations by solving the inverse problem associated with the parabolic partial differential equation governing arbitrage-free derivative security prices. A detailed exposition is given for consistent pricing of equity index options under a stochastic model that treats index volatility as a deterministic function of index level and time.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here