How to make Dupire's local volatility work with jumps

Peter K. Friz, Stefan Gerhold and Marc Yor

Papers from arXiv.org

Abstract: There are several (mathematical) reasons why Dupire's formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note we attempt to explain why. In particular, we propose a regularization procedure of the option data so that Dupire's local vol diffusion process recreates the correct option prices, even in manifest presence of jumps.

Date: 2013-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://arxiv.org/pdf/1302.5548 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1302.5548

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().