Volatility Dynamics for a Single Underlying: Advanced Methods

David Nicolay ()

Chapter Chapter 3 in Asymptotic Chaos Expansions in Finance, 2014, pp 117-210 from Springer

Abstract: Abstract This chapter is dedicated to generalising the ACE approach and its results. These extensions are performed in several directions, which offer some practical and/or some mathematical interest. First we describe the generic ACE methodology solving the direct problem at an arbitrary order. We then apply this algorithm to compute meaningful IATM differentials, all located within the second and third layers, which we can then exploit and interpret. Next we discuss alternative baselines to Black’s model, and how to transfer IATM information between them. We then introduce a major structural extension, by considering the multi-dimensional framework. We follow the evolution of the inverse and direct problems, and illustrate these results with the case of generic baskets.

Keywords: Direct Problem; Baseline Transfer; Lognormal Baseline; Local Volatility (LV); Instantaneous Volatility (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-1-4471-6506-4_3

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DOI: 10.1007/978-1-4471-6506-4_3

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