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Calibration of Multiscale Two-Factor Stochastic Volatility Models: A Second-Order Asymptotic Expansion Approach
Faculty of Sciences, Dept of Mathematics and Computer Sciences, Eduardo Mondlane University, Mozambique.
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0002-0139-0747
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0002-0835-7536
Mälardalen University, School of Education, Culture and Communication, Educational Sciences and Mathematics. (MAM)ORCID iD: 0000-0001-9635-0301
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2018 (English)In: / [ed] Christos H Skiadas, ISAST: International Society for the Advancement of Science and Technology , 2018Conference paper, Oral presentation with published abstract (Refereed)
Abstract [en]

The development of financial markets imposes more complex models on the option pricing problems. On the previous papers by the authors, we consider a model under which the underlying asset is driven by two independent Heston-type stochastic volatility processes of multiscale (fast and slow) mean-reverting rates and we compute an approximate solution for the option pricing problem, using asymptotic expansion method. In the present paper, we aim to calibrate the model using the market prices of options on Euro Stoxx 50 index and an equity stock in the European market. Our approach is to use the market implied volatility surface for calibrating directly a set of new parameters required in our second-order asymptotic expansion pricing formula for European options. This secondorder asymptotic expansion formula provides a better approximation formula for European option prices than the first-order formula, as explained in an earlier work of the authors.

Place, publisher, year, edition, pages
ISAST: International Society for the Advancement of Science and Technology , 2018.
Keywords [en]
Option pricing model, asymptotic expansion of option price, stochastic volatility model, multiscale stochastic volatility, calibration
National Category
Probability Theory and Statistics
Research subject
Mathematics/Applied Mathematics
Identifiers
URN: urn:nbn:se:mdh:diva-41091ISBN: 978-618-5180-27-0 (print)ISBN: 978-618-5180-29-4 (electronic)OAI: oai:DiVA.org:mdh-41091DiVA, id: diva2:1252089
Conference
SMTDA2018 5th Stochastic Modeling Techniques and Data Analysis International Conference - SMTDA 2018, Crete, Greece
Available from: 2018-09-30 Created: 2018-09-30 Last updated: 2018-10-01Bibliographically approved

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http://www.smtda.net/images/Book_of_Abstracts_SMTDA2018_and_Demographics_Workshop-2-6-2018.pdf

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Malyarenko, AnatoliyNi, YingRancic, MilicaSilvestrov, Sergei

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