LOCAL STOCHASTIC VOLATILITY WITH JUMPS: ANALYTICAL APPROXIMATIONS

Stefano Pagliarani () and Andrea Pascucci
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Stefano Pagliarani: Dipartimento di Matematica, Università di Padova, Via Trieste 63, 35121 Padova, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 08, 1-35

Abstract: We present new approximation formulas for local stochastic volatility models, possibly including Lévy jumps. Our main result is an expansion of the characteristic function, which is worked out in the Fourier space. Combined with standard Fourier methods, our result provides efficient and accurate formulas for the prices and the Greeks of plain vanilla options. We finally provide numerical results to illustrate the accuracy with real market data.

Keywords: Local stochastic volatility; Lévy process; analytical approximation; characteristic function; partial integro-differential equation; Fourier methods (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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DOI: 10.1142/S0219024913500507

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