Blacher University Volatility Model
Posted: August 28th, 2006, 6:24 pm
Anyone had any success with this model? The proposed dynamics are as follows:I implemented a FDM solver for these dynamics but it seems that when I try to price with monte carlo to validate the prices do not agree for certain parameter sets (european put options). Particularly when I turn on the alpha and beta parameters. I believe this is due to the added noise in the diffusion term of the stock price, because unlike a homogeneous model you cannot make a clever change of variables to make the diffusion component a deterministic function. I need to price various exotics and I thought that this model would give the "right" delta as Blacher proposes but it does not seem to be a good model for Monte Carlo solvers (which I require to price many path dependent options such as cliquets). In a related question, could anyone shed some light on the implementation details of the Dynamic SABR model? I've implemented the non-dynamic version which seems to be pricing vanilla's well but not exotics.Thanks in advance-as