Stochastic volatility
The optimal investment problem in stochastic and local volatility models
This paper considers the classical optimal investment allocation problem of Merton through the lens of some more modern approaches, such as the stochastic volatility and local volatility models.
Knocking out corridor variance
Amine Ahallal and Olaf Torne add a knock-out barrier to the standard corridor variance swap
Optimal hedge ratios based on Markov-switching dynamic copula models
In this paper, the authors combine MS dynamic copulas with the skewed t SV model to study the optimal hedge ratios of portfolios.
Equity modelling with local stochastic volatility and stochastic discrete dividends
SocGen quants calibrate local stochastic volatility models with stochastic dividends
The swap market model with local stochastic volatility
An easy to calibrate and accurate swap market model is proposed
Importance sampling applied to Greeks for jump–diffusion models with stochastic volatility
In this paper, the authors develop a procedure to reduce the variance when numerically computing the Greeks obtained via Malliavin calculus for jump–diffusion models with stochastic volatility.
Hybrid finite-difference/pseudospectral methods for the Heston and Heston–Hull–White partial differential equations
In this paper, the authors propose a hybrid spatial finite-difference/pseudospectral discretization for European option-pricing problems under the Heston and Heston–Hull–White models.
What causes forex correlation swaps to be mispriced?
UBS quants show prices can differ by up to 25 correlation points if products modelled accurately
Foreign exchange correlation swap: problem solver or troublemaker?
A correlation structure is an important element in pricing products such as correlation swaps
American quantized calibration in stochastic volatility
Fiorin, Callegaro and Grasselli show how discretisation methods reduce computing time in high-dimensional problems
A hybrid tree/finite-difference approach for Heston–Hull–White-type models
In this paper, the authors study a hybrid tree/finite-difference method, which allows us to obtain efficient and accurate European and American option prices in the Heston–Hull– White and Heston–Hull–White2d models.
Local volatility from American options
De Marco and Henry-Labordère provide an approximation of American options in terms of the local volatility function
Local-stochastic volatility: models and non-models
Lorenzo Bergomi exposes a condition important to the use of LSV models in trading
Pricing and hedging options with rollover parameters
This paper consists of a “horse race” study comparing (i) a number of option pricing models, and (ii) roll-over estimation procedures.
Model-free valuation of barrier options
Austing and Li provide a continuous barrier options pricing formula that fits the volatility smile
‘Hot-start’ initialisation of the Heston model
Serguei Mechkov initialises Heston model’s parameters using probability distributions
Finite difference techniques for arbitrage-free SABR
This paper applies a variety of second-order finite difference schemes to the SABR arbitrage-free density problem and explores alternative formulations.
A mixed Monte Carlo and partial differential equation variance reduction method for foreign exchange options under the Heston–Cox–Ingersoll–Ross model
The paper concerns a hybrid pricing method build upon a combination of Monte Carlo and PDE approach for FX options under the four-factor Heston-CIR model.
The forward smile in local–stochastic volatility models
The Authors introduce a closed-form approximation for the forward implied volatilities.
Numerical solution of the Hamilton–Jacobi–Bellman formulation for continuous-time mean–variance asset allocation under stochastic volatility
The paper deals with robust and accurate numerical solution methods for the nonlinear Hamilton–Jacobi–Bellman partial differential equation (PDE), which describes the dynamic optimal portfolio selection problem.
Valuation of options on discretely sampled variance: a general analytic approximation
In this paper the authors provide a comprehensive treatment of the discretization effect under general stochastic volatility dynamics.
Accelerated trinomial trees applied to American basket options and American options under the Bates model
This paper introduces accelerated trinomial trees, a novel efficient lattice method for the numerical pricing of derivative securities.
B-spline techniques for volatility modeling
In this paper the use of B-splines is advocated for volatility modeling within the calibration of stochastic local volatility (SLV) models and for the parameterization of an arbitrage-free implied volatility surface calibrated to sparse option data.
Isolating a risk premium on the volatility of volatility
Lorenzo Ravagli shows how to exploit a risk premium embedded in the vol of vol in out-of-the-money options