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Title:Calibration design of implied volatility surfaces PDF Logo
Authors:Detlefsen, Kai
Härdle, Wolfgang Karl
Issue Date:2006
Series/Report no.:SFB 649 discussion paper 2006,002
Abstract:The calibration of option pricing models leads to the minimization of an error functional. We show that its usual specification as a root mean squared error implies fluctuating exotics prices and possibly wrong prices. We propose a simple and natural method to overcome these problems, illustrate drawbacks of the usual approach and show advantages of our method. To this end, we calibrate the Heston model to a time series of DAX implied volatility surfaces and then price cliquet options.
Subjects:calibration
data design
implied volatility surface
Heston model
cliquet option
JEL:C80
G13
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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