Inverse problems and regularization techniques in option pricing

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Abstract

Option-price based calibration of stochastic volatility models under fast mean reversion poses quite challenging inverse problems. Nevertheless, in this note we remark that by an appropriate multi-scale asymptotic analysis, one can calibrate the models in a stable way for a number of different asymptotic regimes. These regimes include, but are not restricted to, those studied by Fouque et al. (© 2008 WILEY-VCH Verlag GmbH & Co. KGaA, Weinheim)

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