Publication
Title
A moment matching market implied calibration
Author
Abstract
This paper provides a new market implied calibration based on a moment matching methodology where the moments of the risk-neutral density function are inferred from at-the-money and out-the-money European vanilla option quotes. In particular, we derive a model-independent risk-neutral formula for the moments of the asset log-return distribution function by expanding power returns as a weighted sum of vanilla option payoffs (based on results of Breeden and Litzenberger and Carr and Madan). For the numerical study, we develop different popular exponential Lévy models, namely the VG, NIG and Meixner models. The new calibration methodology rests on closed-form formulae only: it is shown that the moment matching system can be transformed into a system of algebraic equations that computes directly the optimal value of the model parameters in terms of the second to the th market standardized moments under the different Lévy models under investigation. Hence, the proposed calibration can be performed almost instantaneously. Furthermore, for the models considered in this paper, the method does not require any search algorithm and hence any starting value for the model parameters and avoids the problem of becoming stuck in local minima.
Language
English
Source (journal)
Quantitative finance. - London
Publication
London : 2013
ISSN
1469-7688
Volume/pages
13:9(2013), p. 1359-1373
ISI
000328323300004
Full text (Publisher's DOI)
UAntwerpen
Faculty/Department
Publication type
Subject
External links
Web of Science
Record
Identification
Creation 11.03.2014
Last edited 08.12.2017