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Title: Calibration to vanilla and barrier options with the Gyöngy and Brunick-Shreve Markovian projections
Author: Mariapragassam, Matthieu
ISNI:       0000 0004 7229 743X
Awarding Body: University of Oxford
Current Institution: University of Oxford
Date of Award: 2017
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In this thesis, we present a novel approach to the calibration of diffusion models to vanilla and barrier options with the Gyöngy and Brunick-Shreve Markovian projection results. Firstly, we derive a forward equation for arbitrage-free barrier option prices in continuous semi-martingale models, in terms of Markovian projections of the stochastic volatility process. This leads to a Dupire-type formula for the coefficient derived by Brunick and Shreve for their mimicking diffusion and can be interpreted as the canonical extension of local volatility for barrier options. Secondly, we treat the problem of long-dated foreign-exchange option pricing and propose a novel and generic calibration technique to vanilla options for four-factor foreign-exchange hybrid local-stochastic volatility models with stochastic short rates. We build upon the particle method introduced by Guyon and Labordère and combine it with new variance reduction techniques in order to accelerate convergence. Finally, we derive the necessary and sufficient condition for the exact calibration to up-and-out call options and provide a step-by-step procedure to calibrate a Brunick-Shreve volatility model, a Heston-type local-stochastic volatility model with local vol-of-vol and a path-dependent local-maximum-stochastic volatility model. While the Brunick-Shreve model is calibrated with our forward PIDE for barriers, both stochastic volatility models require an interesting two-dimensional extension of the particle method. We then derive and prove the self-consistency condition for perfect calibration to barrier options for path-dependent models with stochastic domestic and foreign short rates, where techniques from our previous work can be combined, in order to price accurately long-dated derivatives with barrier feature.
Supervisor: Musiela, Marek ; Hambly, Ben ; Reisinger, Christoph Sponsor: Oxford-Man Institute
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Mathematics