Strong existence and uniqueness of a calibrated local stochastic volatility model
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arXiv
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| Format: | Preprint |
| Publié: |
2024
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| _version_ | 1866917699649536000 |
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| author | Mustapha, Scander |
| author_facet | Mustapha, Scander |
| contents | We study a two-dimensional McKean-Vlasov stochastic differential equation, whose volatility coefficient depends on the conditional distribution of the second component with respect to the first component. We prove the strong existence and uniqueness of the solution, establishing the well-posedness of a two-factor local stochastic volatility (LSV) model calibrated to the market prices of European call options. In the spirit of [Jourdain and Zhou, 2020, Existence of a calibrated regime switching local volatility model.], we assume that the factor driving the volatility of the log-price takes finitely many values. Additionally, the propagation of chaos of the particle system is established, giving theoretical justification for the algorithm [Julien Guyon and Henry-Labordère, 2012, Being particular about calibration.]. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2406_14074 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Strong existence and uniqueness of a calibrated local stochastic volatility model Mustapha, Scander Probability Analysis of PDEs Mathematical Finance 60G99, 35A01, 35A02 We study a two-dimensional McKean-Vlasov stochastic differential equation, whose volatility coefficient depends on the conditional distribution of the second component with respect to the first component. We prove the strong existence and uniqueness of the solution, establishing the well-posedness of a two-factor local stochastic volatility (LSV) model calibrated to the market prices of European call options. In the spirit of [Jourdain and Zhou, 2020, Existence of a calibrated regime switching local volatility model.], we assume that the factor driving the volatility of the log-price takes finitely many values. Additionally, the propagation of chaos of the particle system is established, giving theoretical justification for the algorithm [Julien Guyon and Henry-Labordère, 2012, Being particular about calibration.]. |
| title | Strong existence and uniqueness of a calibrated local stochastic volatility model |
| topic | Probability Analysis of PDEs Mathematical Finance 60G99, 35A01, 35A02 |
| url | https://arxiv.org/abs/2406.14074 |