Analytical approximation of the transition density in a local volatility model

Pagliarani, Stefano and Pascucci, Andrea (2011): Analytical approximation of the transition density in a local volatility model.

Abstract

We present a simplified approach to the analytical approximation of the transition density related to a general local volatility model. The methodology is sufficiently flexible to be extended to time-dependent coefficients, multi-dimensional stochastic volatility models, degenerate parabolic PDEs related to Asian options and also to include jumps.

• Item Type: MPRA Paper
• Language: English
• Keywords: option pricing, analytical approximation, local volatility
• Subjects: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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