Numerical Integral problem for Volatile Volatility and Time to Smile

jaccker · September 5th, 2006, 2:51 pm

Hi, guysI am implementing the call option formula by numerical integration from Andersens paper Volatile Volatility. My result does not make sense. So there must be something wrong with my implementation. I am not quite if it is because the error in the formulas I derived or because of my implementation of numerical integral. The attachment is the formula I derived and please take a look at and see if I make any mistake there. Thank you very much. Jaccker

Awadec · September 12th, 2006, 1:13 pm

Hi JacckerI had the same problem as you too. In my implementation, i didn't solve the Riccati's like you, instead using 4th order Runge-Kutta.I suspect's there's a typo in the original paper. In Eq (4) of your attached doc, try changing the negative 0.5 inside H(..)to positive. That should do the trick. Let me know if it works for you. Hope this helpsAwadec