Why are quadratic normal volatility models analytically tractable?

Peter Carr, Travis Fisher and Johannes Ruf

Papers from arXiv.org

Abstract: We discuss the class of "Quadratic Normal Volatility" models, which have drawn much attention in the financial industry due to their analytic tractability and flexibility. We characterize these models as the ones that can be obtained from stopped Brownian motion by a simple transformation and a change of measure that only depends on the terminal value of the stopped Brownian motion. This explains the existence of explicit analytic formulas for option prices within Quadratic Normal Volatility models in the academic literature.

Date: 2012-02, Revised 2013-03
New Economics Papers: this item is included in nep-ets
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Published in SIAM Journal on Financial Mathematics, 2013 4:1, 185-202

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1202.6187

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