Local variance gamma revisited

Markus Falck and Mikhail Deryabin

Journal of Computational Finance

Abstract: In this paper, we propose a new method of constructing volatility surfaces for foreign exchange options. This methodology is based on the local variance gamma model developed by P. Carr in 2008. Our model generates smooth volatility surfaces, fits market quotes with an error of a few volatility basis points and allows very fast calibration. Using the Levenberg–Marquardt algorithm, we measure the average calibration time to less than one millisecond per expiry. We suggest a simple and fast yet market-consistent technique for arbitrage-free interpolation of volatility in the maturity dimension, and we derive sufficient conditions for the absence of calendar spread arbitrage within our model. We also apply the methodology to pricing variance swaps. ;

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-computational-fina ... ance-gamma-revisited (text/html)

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:rsk:journ0:5315521

Access Statistics for this article

More articles in Journal of Computational Finance from Journal of Computational Finance
Bibliographic data for series maintained by Thomas Paine ().