Accelerating the calibration of stochastic volatility models

Abstract

This article compares the performance of three methods for pricing vanilla options in models with known characteristic function: 1) direct integration, 2) fast Fourier transform (FFT), 3) fractional FFT. The most important application of this comparison is the choice of the fastest method for the calibration of stochastic volatility models, e.g., Heston, Bates, Barndorff-Nielsen-Shephard models or Levy models with stochastic time. We show that using an additional cache technique makes the calibration with the direct integration method at least seven times faster than the calibration with the fractional FFT method. Copyright © 2011 Norsk Regnesentral.