Non-parametric calibration of the local volatility surface for European options
نویسندگان
چکیده
In this paper, we explore a robust method for calibration of the local volatility surface for European options. Assuming the the volatility surface is smooth, we apply a second order Tikhonov regularization to the calibration problem. Additionally we propose a new approach for choosing the Tikhonov regularization parameter. Using the TAPENADE automatic differentiation tool in order to obtain adjoint code of the direct model is employed as an efficient way to obtain the gradient of cost function with respect to the local volatility surface. Finally we perform four numerical tests aimed at assessing and verifying the aforementioned techniques. key words: local volatility surface, second order Tikhonov, iterative regularization, inverse problems
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