Sequential Quadratic Programming Method for Volatility Estimation in Option Pricing

Bertram Düring, A. Jüngel () and S. Volkwein ()
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A. Jüngel: Vienna University of Technology
S. Volkwein: University of Graz

Journal of Optimization Theory and Applications, 2008, vol. 139, issue 3, No 4, 515-540

Abstract: Abstract Our goal is to identify the volatility function in Dupire’s equation from given option prices. Following an optimal control approach in a Lagrangian framework, a globalized sequential quadratic programming (SQP) algorithm combined with a primal-dual active set strategy is proposed. Existence of local optimal solutions and of Lagrange multipliers is shown. Furthermore, a sufficient second-order optimality condition is proved. Finally, some numerical results are presented underlining the good properties of the numerical scheme.

Keywords: Dupire equation; Parameter identification; Optimal control; Optimality conditions; SQP method; Primal-dual active set strategy (search for similar items in EconPapers)
Date: 2008
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Working Paper: A sequential quadratic programming method for volatility estimation in option pricing (2006)
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DOI: 10.1007/s10957-008-9404-4

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