Forums  > Pricing & Modelling  > Calculation of density of SDEs in real time and applications to calibration, pricing and hedging of derivatives  
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Total Posts: 273
Joined: Aug 2005
Posted: 2016-07-05 10:26
This is done by the recent technology of stochastic calculus of standard deviations approach made precise by our latest research work on evolution of the SDEs. In model building, we are not limited by the SDEs that could be solved analytically as has been the practice in traditional financial research. With this modern technique, you can pick any completely general SDE or set of SDEs suited to the asset pricing. If you always thought that a certain set of SDEs describes the dynamics of some tradable asset but you could not use those special dynamics earlier due to lack of knowledge of associated analytics, we can easily do it for you now. We could for example, easily use SABR type correlated stochastic volatility model while the stochastic volatility is given by a mean reverting SDE like the ones used typically in Heston model. For commodities, we could very easily calibrate models in which there are mean reverting dynamics of the commodity and stochastic volatility in the commodity equation is given by some other dynamics one of which could possibly be another mean reverting SDE equation. We can calibrate the models and find greeks in a matter of seconds.

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