A Bayesian take on option pricing with Gaussian processes
Tegner, Martin, Roberts, Stephen
Local volatility is a versatile option pricing model due to its state dependent diffusion coefficient. Calibration is, however, non-trivial as it involves both proposing a hypothesis model of the latent function and a method for fitting it to data. In this paper we present novel Bayesian inference with Gaussian process priors. We obtain a rich representation of the local volatility function with a probabilistic notion of uncertainty attached to the calibrate. We propose an inference algorithm and apply our approach to S&P 500 market data.
Dec-7-2021
- Country:
- Europe
- United Kingdom > England
- Oxfordshire > Oxford (0.14)
- Cambridgeshire > Cambridge (0.04)
- Denmark > Capital Region
- Copenhagen (0.04)
- United Kingdom > England
- Europe
- Genre:
- Research Report (0.40)
- Industry:
- Banking & Finance > Trading (1.00)