March 18th, 2013, 7:59 am
I suspect the problem is to with calibration, i.e. constant mrs is not consistent with a steep SABR vol-of-vol for instance... But I wonder if this is a problem others have enountered ?As for the brute-force approach described by kelang, is it what Bloomerg actually does ? Also, I suppose that in intra-day, not only you want to caqlibrate it a few times only, but you also want to compute "parameters risks" i.e. dvov/dstrangle, drho/driskreversal, etc... to make sure that your intra-day skew vega takes into account as well (otherwise your vega would be missing these, which could have a significant effect) .So instead of a one 30s calculation, it means probably up to 5 points x 10 buckets = 50 calculations (for all bucketed risks), which would take 25mns to run (sequentially). So besides parallelisation inside the calibration, I suppose you'd want to parallelise the corresponding bucketed risks' calibrations as well. All do-able of course, but seems a bit over-engineered. I wonder: is there some approximations that could be done basd on SABR for instance or what not to get to a very similar result, but without having to calibrate the mixed local stoch vol multiple times ?