In quantitative finance practice, model calibration is a key challenge. This is especially so when a local regime-switching model needs to be calibrated because designing an efficient and reliable algorithm to obtain local volatility values as a function of underlying price and time is important for the model to be successfully used in practice. Therefore, this paper proposes a new algorithm for calibrating local regime-switching models with observed option prices available for a particular market that is suitable for this type of model. The newly proposed algorithm is tested with calibrations performed on synthetic as well as real market data. Our empirical test results indicate that the algorithm has great potential to be used in financial risk management.

中文翻译：

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校准当地政权转换模型的新算法

在量化金融实践中，模型校准是一个关键挑战。当需要校准本地体制转换模型时，尤其如此，因为设计一种有效且可靠的算法来获取作为基础价格和时间的函数的本地波动率值对于在实践中成功使用该模型很重要。因此，本文提出了一种新的算法，该算法可使用适用于此类模型的特定市场的可用观察到的期权价格来校准本地政权转换模型。新提出的算法已通过对合成数据和实际市场数据执行的校准进行了测试。我们的经验测试结果表明，该算法在金融风险管理中具有很大的潜力。