Don't stay local - extrapolation analytics for Dupire's local volatility
Please always quote using this URN:urn:nbn:de:0296-matheon-8589
- A robust implementation of a Dupire type local volatility model is an important issue for every option trading floor. Typically, this (inverse) problem is solved in a two step procedure : (i) a smooth parametrization of the implied volatility surface; (ii) computation of the local volatility based on the resulting call price surface. Point (i), and in particular how to extrapolate the implied volatility in extreme strike regimes not seen in the market, has been the subject of numerous articles, starting with Lee (Math. Finance, 2004). In the present paper we give direct analytic insights into the asymptotic behavior of local volatility at extreme strikes.
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| Author: | Peter Friz, Stefan Gerhold |
|---|---|
| URN: | urn:nbn:de:0296-matheon-8589 |
| Referee: | Peter Karl Friz |
| Document Type: | Preprint, Research Center Matheon |
| Language: | English |
| Date of first Publication: | 2011/06/21 |
| Release Date: | 2011/06/21 |
| Tag: | |
| Institute: | Technische Universität Berlin |
| MSC-Classification: | 60-XX PROBABILITY THEORY AND STOCHASTIC PROCESSES (For additional applications, see 11Kxx, 62-XX, 90-XX, 91-XX, 92-XX, 93-XX, 94-XX) |
| Preprint Number: | 800 |
