Dupire’s formulas in the Piterbarg option pricing model

Coenraad C.A. Labuschagne and Sven T. von Boetticher

The North American Journal of Economics and Finance, 2016, vol. 38, issue C, 148-162

Abstract: In this paper we derive an expression for the local volatility of an underlying asset, given the prices of liquid European call options under the Piterbarg framework. The Piterbarg framework is a multi-curve derivative pricing model which extends the well known Black–Scholes–Merton model by relaxing the assumption of a risk-free interest rate, and includes collateral payments. The expressions for the local volatility is a function of the option price surface, and is then transformed to become a function of the implied volatility surface.

Keywords: Dupire; Local volatility; Option pricing; Piterbarg (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:38:y:2016:i:c:p:148-162

DOI: 10.1016/j.najef.2016.09.002

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