Stochastic Local Volatility models and the Wei-Norman factorization method

Julio Guerrero and Giuseppe Orlando

Papers from arXiv.org

Abstract: In this paper, we show that a time-dependent local stochastic volatility (SLV) model can be reduced to a system of autonomous PDEs that can be solved using the Heat kernel, by means of the Wei-Norman factorization method and Lie algebraic techniques. Then, we compare the results of traditional Monte Carlo simulations with the explicit solutions obtained by said techniques. This approach is new in the literature and, in addition to reducing a non-autonomous problem into an autonomous one, allows for reduced time in numerical computations.

Date: 2022-01
New Economics Papers: this item is included in nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2201.11241

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