How to make Dupire's local volatility work with jumps<xref ref-type="fn" rid="FN0001"/>

There are several (mathematical) reasons why Dupire's formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note, we attempt to explain why. In particular, we propose a regularization procedure of the option data so that Dupire's local vol diffusion process recreates the correct option prices, even in manifest presence of jumps.

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Year of publication:	2013
Authors:	Friz, Peter K. ; Gerhold, Stefan ; Yor, Marc
Published in:	Quantitative Finance. - Taylor & Francis Journals, ISSN 1469-7688. - Vol. 14.2013, 8, p. 1327-1331
Publisher:	Taylor & Francis Journals

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Extent:	text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010976206