Calibration of a path-dependent volatility model: Empirical tests

Authors:
Paolo Foschi;Andrea Pascucci
Affiliations:
Faculty of Economics, Forlí Campus, University of Bologna, Piazzale della Vittoria, 15 - 47100 Forlí, Italy;Department of Mathematics, University of Bologna, Piazza di Porta S. Donato, 5 - 40126 Bologna, Italy
Venue:
Computational Statistics & Data Analysis
Year:
2009

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Abstract

The Hobson and Rogers model for option pricing is considered. This stochastic volatility model preserves the completeness of the market and can potentially reproduce the observed smile and term structure patterns of implied volatility. A calibration procedure based on ad-hoc numerical schemes for hypoelliptic PDEs is proposed and used to quantitatively investigate the pricing performance of the model. Numerical results based on S&P500 option prices are discussed.