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The main objective of this paper is to study the behavior of a daily calibration of a multivariate stochastic volatility model, namely the principal component stochastic volatility (PCSV) model, to market data of plain vanilla options on foreign exchange rates. To this end, a general setting describing a foreign exchange market is introduced. Two adequate models—PCSV and a simpler multivariate Heston...
Numerous publications take a perfect recovery of the actual parameters during a calibration of stochastic volatility models, such as the Heston model and other continuous option pricing models, for granted. However, we show that this is a misleading assumption and that a high accuracy in capturing the true model parameters is not guaranteed for standard calibration approaches, as they are commonly...
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