The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

Pricing Partners Implements Simplex Algorithm and Significantly Enhances its Calibration Power

Share article

Pricing Partners announced today that Simplex, a new optimisation technique, has been implemented in the Price-it Library to enhance its calibration power. This algorithm allows time dependent Heston Model parameters, accelerates calibration procedure and improves calibration accuracy. With this upgraded numerical method, Pricing Partners enriches Price-it Library and undoubtedly enhances its strong authority on cutting edge model expertise.

A calibration procedure is a necessary step during which market data (usually implied BS volatility) is used as input to determine the parameters of a financial model. The optimum research for those parameters enables the model to fit the best the input market data. However, calibration can be time consuming and depends on the size of the input data, on the number of parameters to calibrate and also on the calibration algorithm itself. Therefore, Pricing Partners tested several methods before picking this Simplex one. Simplex is a powerful method that optimises calibration procedure and effectiveness.

Compared with Levenberg Marquardt, the local and initial value sensitive algorithm, Simplex, a global algorithm, is the only robust and easy method, which is irrelevant to initial input value. On the other hand, a model parameter can be either time dependent or constant. Unlike commonly used calibration methods on the market today, which only provide constant parameters, Simplex produces time dependent parameters. Simplex is suitable for the time dependent Heston Model, a model known for its competitive accuracy and speed. With this outstanding market fit algorithm, virtually any type of underlying derivative can be calibrated precisely by Pricing Partners.

Zaizhi Wang, financial engineer at Pricing Partners, comments: “As a great advantage in Price-it solution, one can use either constant or time dependent parameters for a Heston model. Our newly implemented Simplex enables us to calibrate the time dependent parameters for a stochastic volatility models with a good fit on the entire volatility surface. Users can even choose constant or time dependent parameters. They can also easily retrieve calibration error and quickly measure the overall fitting error for the entire smile surface. I consider the Simplex algorithm robust and reliable in calibration.”

Pricing Partners CEO, Eric Benhamou, adds: “Calibration is key to valuation. Improving the calibration enables us to provide more accurate models and provide unmatched precision in our valuation. Time dependent stochastic volatility models are currently the latest cutting edge models and generate smile and forward smile very consistent to the market. Proving powerful calibration sets therefore gives us a clear advantage to our competitors and positions us as a leading independent valuation and analytics provider”

Related content

WEBINAR

Recorded Webinar: How to leverage the LIBOR transition to improve your data management game

The transition away from LIBOR (London Interbank Offered Rate) is well underway, but there remains considerable ambiguity around how the final stages will be executed – especially with regards to benchmark replacements in markets outside the UK. What are the options, where are the uncertainties and what stage have firms reached in their preparations? The...

BLOG

Debut Virtual Data Management Summit Highlights Industry Agility

In an extraordinary achievement that attracted over 1,000 delegates and well over 20,000 views, A-Team Group’s debut Virtual Data Management Summit went live last week to showcase the most cutting-edge content from an industry that has shown itself to be both resilient and responsive to the unique challenges presented by the ongoing coronavirus epidemic. Focusing...

EVENT

RegTech Summit Virtual

The RegTech Summit Virtual which took place in June 2020 was a huge success with over 1,100 delegates registered. We are currently working on our plans for 2021 and we hope to be back with an in-person event. Whatever the future holds you can guarantee our 2021 event will be back with an exceptional guest speaker line up of Regtech practitioners, regulators, start-ups and solution providers to collaborate and discuss innovative and effective approaches for building a better regulatory environment. Can't wait until 2021? make sure you sign up to our RegTech Summit Virtual, November 2020. More info...

GUIDE

Regulatory Data Handbook 2019/2020 – Seventh Edition

Welcome to A-Team Group’s best read handbook, the Regulatory Data Handbook, which is now in its seventh edition and continues to grow in terms of the number of regulations covered, the detail of each regulation and the impact that all the rules and regulations will have on data and data management at your institution. This...