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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.

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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.

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