Related papers: Introduction into "Local Correlation Modelling"
The pricing of derivatives tied to baskets of assets demands a sophisticated framework that aligns with the available market information to capture the intricate non-linear dependency structure among the assets. We describe the dynamics of…
The local volatility model is a widely used for pricing and hedging financial derivatives. While its main appeal is its capability of reproducing any given surface of observed option prices---it provides a perfect fit---the essential…
Local volatility is a versatile option pricing model due to its state dependent diffusion coefficient. Calibration is, however, non-trivial as it involves both proposing a hypothesis model of the latent function and a method for fitting it…
We present an algorithm for the calibration of local volatility from market option prices through deep self-consistent learning, by approximating both market option prices and local volatility using deep neural networks. Our method uses the…
This paper presents how to apply the stochastic collocation technique to assets that can not move below a boundary. It shows that the polynomial collocation towards a lognormal distribution does not work well. Then, the potentials issues of…
In this paper, we derive copula-based and empirical dependency models (DMs) for simulating non-independent variables, and then propose a new way for determining the distribution of the model outputs conditional on every subset of inputs.…
In this paper, we are interested in continuous time models in which the index level induces some feedback on the dynamics of its composing stocks. More precisely, we propose a model in which the log-returns of each stock may be decomposed…
We address an important yet challenging problem - modeling high-dimensional dependencies across multivariates such as financial indicators in heterogeneous markets. In reality, a market couples and influences others over time, and the…
A robust implementation of a Dupire type local volatility model is an important issue for every option trading floor. Typically, this (inverse) problem is solved in a two step procedure : (i) a smooth parametrization of the implied…
The calibration of a local volatility models to a given set of option prices is a classical problem of mathematical finance. It was considered in multiple papers where various solutions were proposed. In this paper an extension of the…
We present a stochastic local volatility model for derivative contracts on commodity futures. The aim of the model is to be able to recover the prices of derivative claims both on futures contracts and on indices on futures strategies.…
We study the local volatility function in the Foreign Exchange market where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and…
It is well known that the dependence structure for jointly Gaussian variables can be fully captured using correlations, and that the conditional dependence structure in the same way can be described using partial correlations. The partial…
Pricing composite and quanto contracts requires a joint model of both the underlying asset and the exchange rate. In this contribution, we explore the potential of local-correlation models to address the challenges of calibrating synthetic…
We investigate how the local fluctuations of the signed traded volumes affect the dependence of demands between stocks. We analyze the empirical dependence of demands using copulas and show that they are well described by a bivariate…
In this brief review, we critically examine the recent work done on correlation-based networks in financial systems. The structure of empirical correlation matrices constructed from the financial market data changes as the individual stock…
We present a new method for articulating scale-dependent topological descriptions of the network structure inherent in many complex systems. The technique is based on "Partition Decoupled Null Models,'' a new class of null models that…
This paper examines asymmetric and time-varying dependency structures between financial returns, using a novel approach consisting of a combination of regime-switching models and the local Gaussian correlation (LGC). We propose an LGC-based…
We propose a new framework for modeling stochastic local volatility, with potential applications to modeling derivatives on interest rates, commodities, credit, equity, FX etc., as well as hybrid derivatives. Our model extends the…
We study the emergence of instabilities in a stylized model of a financial market, when different market actors calculate prices according to different (local) market measures. We derive typical properties for ensembles of large random…