Abstract
This paper explains how to calibrate a stochastic collocation polynomial against market option prices directly. The method is first applied to the interpolation of short-maturity equity option prices in a fully arbitrage-free manner and then to the joint calibration of the constant maturity swap convexity adjustments with the interest rate swaptions smile. To conclude, we explore some limitations of the stochastic collocation technique.
Original language | English |
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Pages (from-to) | 679-714 |
Number of pages | 36 |
Journal | Decisions in Economics and Finance: a journal of applied mathematics |
Volume | 42 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1 Dec 2019 |
Keywords
- Arbitrage-free
- Implied volatility
- Quantitative finance
- Risk-neutral density
- Stochastic collocation