Recent advances in stochastic volatility jump diffusions: Calibration and exotic option pricing

Speaker: Dr. Jean-Phillipe Aguilar, Head of Pricing Models Audit, Societe Generale, Paris La Defense

Abstract:Stochastic Volatility Jump Diffusion (SVJ) models combine the advantages of both stochastic volatility and jump models, while addressing some of their well-known limitations; moreover, they often calibrate well in equity and FX markets. In this talk we will focus on a particular class of SVJ models, namely the Heston Kou Double Exponential (HKDE) model, that has recently been investigated in detail and shown to outperform challenger models possessing similar features. We will discuss the main properties of the HKDE model as well has its calibration to single stock and FX option data, demonstrating a better fit of the volatility smile when compared to several challenger models; we will also discuss the smile sensitivity to the HKDE model parameters as well as their econometrics interpretations. Last, we will provide application to the pricing and analysis of several generations of exotic contracts by means of advanced Fourier pricing (PROJ method in particular).

Joint work with Gaetano Agazzotti, Claudio Aglieri Rinella and Justin Lars Kirkby.