Using Equity Options In Market-Consistent Calibration
Document ID: 2005-792 (previously 2005/003)
Published on: 1st January 2005
Author: Craig Turnbull, Steven Morrison
B&H produce regular market-consistent calibrations for a number of equity models available in the Economic Scenario Generator. Our approach to calibration to date has assumed that option-implied total return volatility is the same as that of price returns. We have therefore calibrated the equity total returns produced by our equity models to the equity price index volatilities implied by FTSE 100 option prices. However, this is an important assumption in the market-consistent ESG calibration process and deserves careful attention. This note discusses the use of equity option market prices in market-consistent valuation in further detail.
