Re: LocalvolSurface.cpp

Posted by Dimathematician on
URL: http://quantlib.414.s1.nabble.com/LocalvolSurface-cpp-tp12806p12812.html

Just a remark regarding interpolation. I've implemented kernel

interpolation (its in the trunk), which can be made sufficiently smooth 

by choosing a proper standard deviation of the gaussian kernel. I've heard 

that this smoothness property makes it a good choice for local vol calibrations.

I don't have any personal experience with that though.

2009/4/29 Klaus Spanderen <[hidden email]>

Hi

> I ran my tests with both. BiLinear and BiCubic intrapolation. I encountered
> the instability issues with both.

BiLinear interpolation doesn't work due to the jumps in the first derivative.
BiCubic should be much better.

> You are right that the problems appear far ITM and OTM. But I cant really
> figure out why, since I set up a constant extrapolation for both, Strike
> and Maturity in my BlackVarianceSurface.

Constant extrapolation could introduce arbitrage violations far ITM or far OTM
and these arbitrage violations can lead to negative variances. Is this part
of the problem in your tests?

> Thank you also for the link. To me it seem like if we want to use the
> dupire formula efficient, stable and productive, we wont get around
> implementing some fancy optimization-splines and smoothing algorithm.

yes.;-)

regards
 Klaus

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