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Journal of Inverse and Ill-posed Problems

Editor-in-Chief: Kabanikhin, Sergey I.


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1569-3945
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Volume 21, Issue 1

Issues

The use of statistical tests to calibrate the normal SABR model

Lorella Fatone
  • Dipartimento di Matematica e Informatica, Università di Camerino, Via Madonna delle Carceri 9, 62032 Camerino (MC), Italy
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/ Francesca Mariani
  • Dipartimento di Scienze Economiche, Università degli Studi di Verona, Vicolo Campofiore 2, 37129 Verona (VR), Italy
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/ Maria Cristina Recchioni / Francesco Zirilli
  • Dipartimento di Matematica “G. Castelnuovo”, Università di Roma “La Sapienza”, Piazzale Aldo Moro 2, 00185 Roma (RM), Italy
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Published Online: 2013-02-01 | DOI: https://doi.org/10.1515/jip-2012-0093

Abstract.

We investigate the idea of solving calibration problems for stochastic dynamical systems using statistical tests. We consider a specific stochastic dynamical system: the normal SABR model. The SABR model has been introduced in mathematical finance in 2002 by Hagan, Kumar, Lesniewski and Woodward. The model is a system of two stochastic differential equations whose independent variable is time and whose dependent variables are the forward prices/rates and the associated stochastic volatility. The normal SABR model is a special case of the SABR model. The calibration problem for the normal SABR model is an inverse problem that consists in determining the values of the parameters of the model from a set of data. We consider as set of data two different sets of forward prices/rates and we study the resulting calibration problems. Ad hoc statistical tests are developed to solve these calibration problems. Estimates with statistical significance of the parameters of the model are obtained. Let be a constant, we consider multiple independent trajectories of the normal SABR model associated to given initial conditions assigned at time . In the first calibration problem studied the set of the forward prices/rates observed at time in this set of trajectories is used as data sample of a statistical test. The statistical test used to solve this calibration problem is based on some new formulae for the moments of the forward prices/rates variable of the normal SABR model. The second calibration problem studied uses as data sample the observations of the forward prices/rates made on a discrete set of given time values along a single trajectory of the normal SABR model. The statistical test used to solve this second calibration problem is based on the numerical evaluation of some high-dimensional integrals. The results obtained in the study of the normal SABR model are easily extended from mathematical finance to other contexts in science and engineering where stochastic models involving stochastic volatility or stochastic state space models are used.

Keywords: SABR model; calibration; statistical tests; Monte Carlo

About the article

Received: 2012-12-04

Published Online: 2013-02-01

Published in Print: 2013-02-01


Citation Information: Journal of Inverse and Ill-Posed Problems, Volume 21, Issue 1, Pages 59–84, ISSN (Online) 1569-3945, ISSN (Print) 0928-0219, DOI: https://doi.org/10.1515/jip-2012-0093.

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