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An Implementation of Bouchouev's Method for a Short Time Calibration of Option Pricing Models

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Author Info
Carl Chiarella
Mark Craddock
Nadima El-Hassan

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Abstract

We analyse the Bouchouev integral equation for the deterministic volatility function in the Black–Scholes option pricing model. We areable to reduce Bouchouev's original triple integral equation to a single integral equation and describe its numerical solution. Moreover we show empirically that the most complex term in the equation may often be safely ignored for the purposes of numerical calculations. We present a selection of numerical examples indicating the range of time values for which we would expect the equation to be valid. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1026177612385
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Publisher Info
Article provided by Springer in its journal Computational Economics.

Volume (Year): 22 (2003)
Issue (Month): 2 (October)
Pages: 113-138
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Handle: RePEc:kap:compec:v:22:y:2003:i:2:p:113-138

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Web page: http://www.springerlink.com/link.asp?id=100248

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Related research
Keywords: inverse problems; calibration; integral equations; fundamental solutions of PDE;

References listed on IDEAS
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  1. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July. [Downloadable!] (restricted)
  2. Carl Chiarella & Mark Craddock & Nadima El-Hassan, 2000. "The Calibration of Stock Option Pricing Models Using Inverse Problem Methodology," Research Paper Series 39, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  3. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley. [Downloadable!]
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