The Adjoint Method for the Inverse Problem of Option Pricing

Shou-Lei Wang, Yu-Fei Yang and Yu-Hua Zeng

Mathematical Problems in Engineering, 2014, vol. 2014, 1-7

Abstract:

The estimation of implied volatility is a typical PDE inverse problem. In this paper, we propose the model for identifying the implied volatility. The optimal volatility function is found by minimizing the cost functional measuring the discrepancy. The gradient is computed via the adjoint method which provides us with an exact value of the gradient needed for the minimization procedure. We use the limited memory quasi-Newton algorithm (L-BFGS) to find the optimal and numerical examples shows the effectiveness of the presented method.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:314104

DOI: 10.1155/2014/314104

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