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Volume 13/Number 2, Winter 2009/10 Research Papers Calibration of local volatility using the local and implied instantaneous variance Gabriel Turinici
CEREMADE, Université Paris Dauphine, Place du Marechal de Lattre de Tassigny, 75016 Paris, France; email: gabriel.turinici@dauphine.fr We document the calibration of the local volatility in terms of local and implied instantaneous variances; we first explore the theoretical properties of the method for a particular class of volatilities. We confirm the theoretical results through a numerical procedure which uses a Gauss-Newton style approximation of the Hessian in the framework of a sequential quadratic programming approach. The procedure performs well on benchmarks from the literature and on foreign exchange data.
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