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Global Calibration Claudio Albanese 1
 

Summary: Global Calibration
Claudio Albanese 1
September 13, 2009
Abstract
Current technology advances in computer engineering broaden substantially the realm
of possibilities in the art of risk management of derivative portfolios. In this article, we
discuss the benefits and technical feasibility of global calibration strategies. Although the
industry is largely based on local calibration, we argue that global calibration is nowadays
emerging as technically feasible and represents a useful complement to existing method-
ologies.
1 Calibration Strategies
Calibrating financial models is a challenging optimization task, particularly difficult for inter-
est rate exotics, long dated and hybrid products and credit-equity derivatives and correlation
structures. Local calibration methodologies are based on special models which are solvable
in closed form for a handful of derivatives to be used as both hedging vehicles and calibration
targets. Global calibration provides an antipodal alternative tackling the computational issues
in engineering rather than in mathematics, thus avoiding to impose solvability restrictions on
the underlying dynamics. Flexibility in the dynamic specification is obviously beneficial as it
confers robustness and economic realism to the modeling exercise. A model with an unreal-
istic dynamic specification may calibrate to a handful of targets but will never be consistent

  

Source: Albanese, Claudio - Department of Mathematics, King's College London

 

Collections: Mathematics