Positive Stochastic Collocation for the Collocated Local Volatility Model

Fabien Le Floc'h and Cornelis Oosterlee

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Abstract: This paper presents how to apply the stochastic collocation technique to assets that can not move below a boundary. It shows that the polynomial collocation towards a lognormal distribution does not work well. Then, the potentials issues of the related collocated local volatility model (CLV) are explored. Finally, a simple analytical expression for the Dupire local volatility derived from the option prices modelled by stochastic collocation is given.

Date: 2021-09
New Economics Papers: this item is included in nep-isf and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2109.02405

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