Calibration design of implied volatility surfaces

Arbeitspapier

The calibration of option pricing models leads to the minimization of an error functional. We show that its usual specification as a root mean squared error implies fluctuating exotics prices and possibly wrong prices. We propose a simple and natural method to overcome these problems, illustrate drawbacks of the usual approach and show advantages of our method. To this end, we calibrate the Heston model to a time series of DAX implied volatility surfaces and then price cliquet options.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2006,002

Classification and Topics

• Classification: Wirtschaft ; Data Collection and Data Estimation Methodology; Computer Programs: General ; Contingent Pricing; Futures Pricing; option pricing
• Subject: calibration ; data design ; implied volatility surface ; Heston model ; cliquet option

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Detlefsen, Kai ; Härdle, Wolfgang Karl
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/25085
• Last update: 10.03.2025, 11:46 AM CET