June 19th, 2008, 8:13 am
Clopinette and list,you should both read:1. "A Perfect Calibration! Now What?" Wim Schoutens, Erwin Simons and Jurgen Tistaert, Wilmott Mar 2004 6678 (Some of the dangers of calibration.)2. "Stochastic volatility and mean-variance analysis." Hyungsok Ahn and Paul Wilmott, Wilmott Nov 2003 8490 (How to use real probabilities and yet still calibrate!)3. "Which free lunch would you like today, Sir? Delta hedging, volatility arbitrage and optimal portfolios." Riaz Ahmad and Paul Wilmott, Wilmott Nov 2005 6479 (Prop trading for quants!)4. "The Market Price of Interest-rate Risk: Measuring and Modelling Fear and Greed in the Fixed-income Markets." Riaz Ahmad and Paul Wilmott, Wilmott Jan 2007 6470 (Why calibration is unstable, it's because people are! Nice plot of the market price of risk.)These papers question the idea of risk neutrality and calibration. Clopinette, you can't say things have to be accepted without questioning them!P