Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
6874448 | Journal of Computational Science | 2018 | 14 Pages |
Abstract
The calibration of a local volatility models to a given set of option prices is a classical problem of mathematical finance. It was considered in multiple papers where various solutions were proposed. In this paper an extension of the approach proposed in Lipton, Sepp 2011 is developed by (i) replacing a piecewise constant local variance construction with a piecewise linear one, and (ii) allowing non-zero interest rates and dividend yields. Our approach remains analytically tractable; it combines the Laplace transform in time with an analytical solution of the resulting spatial equations in terms of Kummer's degenerate hypergeometric functions.
Keywords
Related Topics
Physical Sciences and Engineering
Computer Science
Computational Theory and Mathematics
Authors
Andrey Itkin, Alexander Lipton,