New approximations in local volatility models
AbstractFor general time-dependent local volatility models, we propose new approximation formulas for the price of call options. This extends previous results of [BGM10b] where stochastic expansions combined with Malliavin calculus were performed to obtain approximation formulas based on the local volatility At The Money. Here, we derive alternative expansions involving the local volatility at strike. Averaging both expansions give even more accurate results. Approximations of the implied volatility are provided as well.
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Date of creation: 05 Oct 2010
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-ETS-2010-10-16 (Econometric Time Series)
- NEP-MST-2010-10-16 (Market Microstructure)
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