LOCAL STOCHASTIC VOLATILITY WITH JUMPS: ANALYTICAL APPROXIMATIONS

We present new approximation formulas for local stochastic volatility models, possibly including Lévy jumps. Our main result is an expansion of the characteristic function, which is worked out in the Fourier space. Combined with standard Fourier methods, our result provides efficient and accurate formulas for the prices and the Greeks of plain vanilla options. We finally provide numerical results to illustrate the accuracy with real market data.

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Year of publication:	2013
Authors:	PAGLIARANI, STEFANO ; PASCUCCI, ANDREA
Published in:	International Journal of Theoretical and Applied Finance (IJTAF). - World Scientific Publishing Co. Pte. Ltd., ISSN 1793-6322. - Vol. 16.2013, 08, p. 1350050-1
Publisher:	World Scientific Publishing Co. Pte. Ltd.
Subject:	Local stochastic volatility \| Lévy process \| analytical approximation \| characteristic function \| partial integro-differential equation \| Fourier methods

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Type of publication:	Article
Source:	RePEc - Research Papers in Economics

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