Munich Personal RePEc Archive

Adjoint expansions in local Lévy models

Stefano, Pagliarani and Pascucci, Andrea and Candia, Riga (2011): Adjoint expansions in local Lévy models.

This is the latest version of this item.


Download (448kB) | Preview


We propose a novel method for the analytical approximation in local volatility models with Lèvy jumps. In the case of Gaussian jumps, we provide an explicit approximation of the transition density of the underlying process by a heat kernel expansion: the approximation is derived in two ways, using PIDE techniques and working in the Fourier space. Our second and main result is an expansion of the characteristic function for a local volatility model with general Lévy jumps. Combined with standard Fourier methods, such an expansion allows to obtain efficient and accurate pricing formulae. Numerical tests confirm the effectiveness of the method.

Available Versions of this Item

Logo of the University Library LMU Munich
MPRA is a RePEc service hosted by
the University Library LMU Munich in Germany.