net.finmath.montecarlo.interestrate.modelplugins

Class LIBORCovarianceModelStochasticVolatility

java.lang.Object

net.finmath.montecarlo.interestrate.modelplugins.AbstractLIBORCovarianceModel

net.finmath.montecarlo.interestrate.modelplugins.AbstractLIBORCovarianceModelParametric

net.finmath.montecarlo.interestrate.modelplugins.LIBORCovarianceModelStochasticVolatility

public class LIBORCovarianceModelStochasticVolatility
extends AbstractLIBORCovarianceModelParametric

Simple stochastic volatility model, using a process \[ d\lambda(t) = \nu \lambda(t) \left( \rho \mathrm{d} W_{1}(t) + \sqrt{1-\rho^{2}} \mathrm{d} W_{2}(t) \right) \text{,} \] where \( \lambda(0) = 1 \) to scale all factor loadings \( f_{i} \) returned by a given covariance model. The model constructed is \( \lambda(t) F(t) \) where \( \lambda(t) \) is the (Euler discretization of the) above process and \( F = ( f_{1}, \ldots, f_{m} ) \) is the factor loading from the given covariance model. The process uses the first two factors of the Brownian motion provided by an object implementing BrownianMotionInterface. This can be used to generate correlations to other objects. If you like to reuse a factor of another Brownian motion use a BrownianMotionView to delegate \( ( \mathrm{d} W_{1}(t) , \mathrm{d} W_{2}(t) ) \) to a different object. The parameter of this model is a joint parameter vector, consisting of the parameter vector of the given base covariance model and appending the parameters ν and ρ at the end. If this model is not calibrateable, its parameter vector is that of the covariance model, i.e., ν and ρ will be not part of the calibration. For an illustration of its usage see the associated unit test.

Author:

Christian Fries

Constructor Summary

Constructors

Constructor and Description
LIBORCovarianceModelStochasticVolatility(AbstractLIBORCovarianceModelParametric covarianceModel, BrownianMotionInterface brownianMotion, double nu, double rho, boolean isCalibrateable) Create a modification of a given AbstractLIBORCovarianceModelParametric with a stochastic volatility scaling.

Method Summary

Modifier and Type	Method and Description
Object	clone()
RandomVariableInterface[]	getFactorLoading(int timeIndex, int component, RandomVariableInterface[] realizationAtTimeIndex) Return the factor loading for a given time index and component index.
RandomVariableInterface	getFactorLoadingPseudoInverse(int timeIndex, int component, int factor, RandomVariableInterface[] realizationAtTimeIndex) Returns the pseudo inverse of the factor matrix.
double[]	getParameter() Get the parameters of determining this parametric covariance model.
void	setParameter(double[] parameter)

Methods inherited from class net.finmath.montecarlo.interestrate.modelplugins.AbstractLIBORCovarianceModelParametric

getCloneCalibrated, getCloneCalibrated, getCloneWithModifiedParameters, toString

Methods inherited from class net.finmath.montecarlo.interestrate.modelplugins.AbstractLIBORCovarianceModel

getCovariance, getCovariance, getFactorLoading, getFactorLoading, getLiborPeriodDiscretization, getNumberOfFactors, getTimeDiscretization

Methods inherited from class java.lang.Object

equals, finalize, getClass, hashCode, notify, notifyAll, wait, wait, wait

Constructor Detail

LIBORCovarianceModelStochasticVolatility

public LIBORCovarianceModelStochasticVolatility(AbstractLIBORCovarianceModelParametric covarianceModel,
                                                BrownianMotionInterface brownianMotion,
                                                double nu,
                                                double rho,
                                                boolean isCalibrateable)

Create a modification of a given AbstractLIBORCovarianceModelParametric with a stochastic volatility scaling.

Parameters:

covarianceModel - A given AbstractLIBORCovarianceModelParametric.

brownianMotion - An object implementing BrownianMotionInterface with at least two factors. This class uses the first two factors, but you may use BrownianMotionView to change this.

nu - The initial value for ν, the volatility of the volatility.

rho - The initial value for ρ the correlation to the first factor.

isCalibrateable - If true, the parameters ν and ρ are parameters. Note that the covariance model (covarianceModel) may have its own parameter calibration settings.

Method Detail

getParameter

public double[] getParameter()

Description copied from class: AbstractLIBORCovarianceModelParametric

Get the parameters of determining this parametric covariance model. The parameters are usually free parameters which may be used in calibration.

Specified by:

getParameter in class AbstractLIBORCovarianceModelParametric

Returns:

Parameter vector.

setParameter

public void setParameter(double[] parameter)

Specified by:

setParameter in class AbstractLIBORCovarianceModelParametric

clone

public Object clone()

Specified by:

clone in class AbstractLIBORCovarianceModelParametric

getFactorLoading

public RandomVariableInterface[] getFactorLoading(int timeIndex,
                                                  int component,
                                                  RandomVariableInterface[] realizationAtTimeIndex)

Description copied from class: AbstractLIBORCovarianceModel

Return the factor loading for a given time index and component index. The factor loading is the vector f_i such that the scalar product
f_jf_k = f_j,1f_k,1 + ... + f_j,mf_k,m
is the instantaneous covariance of the component j and k.

Specified by:

getFactorLoading in class AbstractLIBORCovarianceModel

Parameters:

timeIndex - The time index at which factor loading is requested.

component - The index of the component i.

realizationAtTimeIndex - The realization of the stochastic process (may be used to implement local volatility/covariance/correlation models).

Returns:

The factor loading f_i(t).

getFactorLoadingPseudoInverse

public RandomVariableInterface getFactorLoadingPseudoInverse(int timeIndex,
                                                             int component,
                                                             int factor,
                                                             RandomVariableInterface[] realizationAtTimeIndex)

Description copied from class: AbstractLIBORCovarianceModel

Returns the pseudo inverse of the factor matrix.

Specified by:

getFactorLoadingPseudoInverse in class AbstractLIBORCovarianceModel

Parameters:

timeIndex - The time index at which factor loading inverse is requested.

component - The index of the component i.

factor - The index of the factor j.

realizationAtTimeIndex - The realization of the stochastic process (may be used to implement local volatility/covariance/correlation models).

Returns:

The entry of the pseudo-inverse of the factor loading matrix.