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Calibrating the sabr model to noisy fx data - university of ...

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The effect of noise on the new fitting technique is also investigated. ... market quotes for the vega-weighted butterfly are complicated by the existence of. 62 pages
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Calibrating the SABR Model toNoisy FX DataKellogg CollegeUniversity of OxfordA thesis submitted in partial fulfillment of the MSc inMathematical FinanceHilary 2018AbstractWe consider the problem of fitting the SABR model to an FX volatilitysmile. It is demonstrated that the model parameter β cannot be deter-mined from a log-log plot of σATM against F . It is also shown that, in anFX setting, the SABR model has a single state variable. A new methodis proposed for fitting the SABR model to observed quotes. In contrast tothe fitting techniques proposed in the literature, the new method allowsall the SABR parameters to be retrieved and does not require prior beliefsabout the market. The effect of noise on the new fitting technique is alsoinvestigated.AcknowledgementsI would like to thank both of my supervisors Dr Daniel Jones and Guil-laume Bigonzi for their guidance and support throughout this project.They provided the direction for this work and offered invaluable insightand advice along...
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