Calibration of Local-Stochastic Volatility Models by Optimal Transport (1906.06478v4)

Abstract: In this paper, we study a semi-martingale optimal transport problem and its application to the calibration of Local-Stochastic Volatility (LSV) models. Rather than considering the classical constraints on marginal distributions at initial and final time, we optimise our cost function given the prices of a finite number of European options. We formulate the problem as a convex optimisation problem, for which we provide a PDE formulation along with its dual counterpart. Then we solve numerically the dual problem, which involves a fully non-linear Hamilton-Jacobi-BeLLMan equation. The method is tested by calibrating a Heston-like LSV model with simulated data and foreign exchange market data.