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Calibration and Filtering of Exponential L\'evy Option Pricing Models

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  • Stavros J. Sioutis

Abstract

The accuracy of least squares calibration using option premiums and particle filtering of price data to find model parameters is determined. Derivative models using exponential L\'evy processes are calibrated using regularized weighted least squares with respect to the minimal entropy martingale measure. Sequential importance resampling is used for the Bayesian inference problem of time series parameter estimation with proposal distribution determined using extended Kalman filter. The algorithms converge to their respective global optima using a highly parallelizable statistical optimization approach using a grid of initial positions. Each of these methods should produce the same parameters. We investigate this assertion.

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  • Stavros J. Sioutis, 2017. "Calibration and Filtering of Exponential L\'evy Option Pricing Models," Papers 1705.04780, arXiv.org.
    • Handle: RePEc:arx:papers:1705.04780
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    1. Dominick Samperi, 2002. "Calibrating a Diffusion Pricing Model with Uncertain Volatility: Regularization and Stability," Mathematical Finance, Wiley Blackwell, vol. 12(1), pages 71-87, January.
    2. Lord, Roger & Fang, Fang & Bervoets, Frank & Oosterlee, Kees, 2007. "A fast and accurate FFT-based method for pricing early-exercise options under Lévy processes," MPRA Paper 1952, University Library of Munich, Germany.
    3. Roger Lord & Christian Kahl, 2006. "Optimal Fourier Inversion in Semi-analytical Option Pricing," Tinbergen Institute Discussion Papers 06-066/2, Tinbergen Institute, revised 05 Jun 2007.
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