We calibrate a novel multifactor stochastic volatility model that includes as special cases the Heston-based model of De Col et al. (2013) and the 3/2-based model of Baldeaux et al. (2015). Using a dataset on vanilla option quotes in a triangle of currencies, we find that the risk neutral approach typically fails for the calibrated model, in line with the results of Baldeaux et al. (2015).
Calibration to FX Triangles of the 4/2 Model Under the Benchmark Approach
Alessandro Gnoatto
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2021-01-01
Abstract
We calibrate a novel multifactor stochastic volatility model that includes as special cases the Heston-based model of De Col et al. (2013) and the 3/2-based model of Baldeaux et al. (2015). Using a dataset on vanilla option quotes in a triangle of currencies, we find that the risk neutral approach typically fails for the calibrated model, in line with the results of Baldeaux et al. (2015).
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