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Reconstructing the time-independent volatility in Black-Scholes equation

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  • Liu, Qingqing
  • Dou, Fangfang

Abstract

The Black-Scholes equation is a mathematical model used to calculate the European option prices. This paper studies an inverse problem of option pricing, that is reconstructing time-independent volatility from observed market prices of European call options based on the Black-Scholes equation. The uniqueness and stability of the inverse problem, as well as the regularization solution based on the Tikhonov regularization strategy, are studied. Moreover, numerical experiments with several examples are also performed to illustrate the effectiveness and accuracy of the proposed method.

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  • Liu, Qingqing & Dou, Fangfang, 2026. "Reconstructing the time-independent volatility in Black-Scholes equation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 239(C), pages 135-154.
    • Handle: RePEc:eee:matcom:v:239:y:2026:i:c:p:135-154
    DOI: 10.1016/j.matcom.2025.04.043
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