Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25085
Authors: 
Detlefsen, Kai
Härdle, Wolfgang Karl
Year of Publication: 
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

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