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Calibration of the Multiscale Stochastic Volatility Model via an Asymptotic Expansion Approach
Mälardalen University, School of Education, Culture and Communication.
Mälardalen University, School of Education, Culture and Communication.
2016 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

We study a model of multiscale stochastic volatility for European option

pricing. In this model there are two volatility factors. The rst volatility

factor is of fast scale of mean-reverting and the second one is of slow scale of

mean-reverting. We review the useful calibration formula derived by Fouque

et al.[2] via an asymptotic expansion method. Our purpose of this study is

two-fold. The rst task is to implement this calibration formula to Swedish

market data, more specically to call option data of ABB stock during the

time span of 4th Mar 2016 to 6th May 2016. We investigate how well the

data tting is assuming only the fast volatility factor and the full model with

both fast and slow volatility factors. We study also the time stability of

the tted parameters over a time period of 10 weeks. The second task is to

study the eect of the parameters included in the calibration formula on the

volatility surface and smile.

Place, publisher, year, edition, pages
2016. , 54 p.
National Category
URN: urn:nbn:se:mdh:diva-31823OAI: diva2:935441
Available from: 2016-08-26 Created: 2016-06-10 Last updated: 2016-08-26Bibliographically approved

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