Some of last peer-reviewed research publications of De Vinci Finance Lab, Pôle Léonard de Vinci’s quantitative finance lab.
The aim of the De Vinci Finance Lab is to develop high-quality economic and financial research. The Lab is comprised of research professors from the schools of engineering and business who undertake collaborative research and publish articles in peer-reviewed academic journals.
Stochastic Skew and Target Volatility Options
Journal of Futures Markets
03/2015, Martino Grasselli University of Padova – Department of Mathematics; Pole Léonard de Vinci, Devinci Finance Lab ; Quanta Finanza S.r.l., Jacinto Marabel Romo, Grupo Banco Bilbao Vizcaya Argentaria (BBVA); Department of Management Sciences, University of Alcalá
Target volatility options (TVO) are a new class of derivatives whose payoff depends on some measure of volatility. These options allow investors to take a joint exposure to the evolution of the underlying asset, as well as to its realized volatility. In equity options markets the slope of the skew is largely independent of the volatility level. A single-factor Heston based volatility model can generate steep skew or flat skew at a given volatility level but cannot generate both for a given parameterization. Since the payoff corresponding to TVO is a function of the joint evolution of the underlying asset and its realized variance, the consideration of stochastic skew is a relevant question for the valuation of TVO. In this sense, this article studies the effect of considering a multifactor stochastic volatility specification in the valuation of the TVO as well as forward-start TVO. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark
Quantized calibration in local volatility
03/2015, Giorgia Callegaro, Lucio Fiorin and Martino Grasselli
Pricing of a derivative should be fast and accurate, otherwise it cannot be calibrated efficiently. Here, Giorgia Callegaro, Lucio Fiorin and Martino Grasselli apply a fast quantization methodology, in a local volatility context, to the pricing of vanilla and barrier options that overcomes the numerical problems in existing methods.
« Pricing currency derivatives under the benchmark approach »
Journal of Banking and Finance
04/2015, Jan Baldeauxa, Martino Grassellib, Eckhard Platene
This paper considers the realistic modelling of derivative contracts on exchange rates. We propose a stochastic volatility model that recovers not only the typically observed implied volatility smiles and skews for short dated vanilla foreign exchange options but allows one also to price payoffs in foreign currencies, lower than possible under classical risk neutral pricing, in particular, for long dated derivatives. The main reason for this important feature is the strict supermartingale property of benchmarked savings accounts under the real world probability measure, which the calibrated parameters identify under the proposed model. Using a real dataset on vanilla option quotes, we calibrate our model on a triangle of currencies and find that the risk neutral approach fails for the calibrated model, while the benchmark approach still works.