A Taylor Series Approach to Pricing and Implied Vol for LSV Models

10 Pages Posted: 24 Aug 2013

See all articles by Matthew Lorig

Matthew Lorig

University of Washington - Applied Mathematics

Stefano Pagliarani

DEAMS, Università di Trieste

Andrea Pascucci

University of Bologna - Department of Mathematics

Date Written: August 22, 2013

Abstract

Using classical Taylor series techniques, we develop a unified approach to pricing and implied volatility for European-style options in a general local-stochastic volatility setting. Our price approximations require only a normal CDF and our implied volatility approximations are fully explicit (ie, they require no special functions, no infinite series and no numerical integration). As such approximate prices can be computed as efficiently as Black-Scholes prices, and approximate implied volatilities can be computed nearly instantaneously.

Suggested Citation

Lorig, Matthew and Pagliarani, Stefano and Pascucci, Andrea, A Taylor Series Approach to Pricing and Implied Vol for LSV Models (August 22, 2013). Available at SSRN: https://ssrn.com/abstract=2314687 or http://dx.doi.org/10.2139/ssrn.2314687

Matthew Lorig (Contact Author)

University of Washington - Applied Mathematics ( email )

Seattle, WA
United States

Stefano Pagliarani

DEAMS, Università di Trieste ( email )

Via Valerio n. 4/1
Trieste
Italy

HOME PAGE: http://www.cmap.polytechnique.fr/~pagliarani/

Andrea Pascucci

University of Bologna - Department of Mathematics ( email )

Piazzadi Porta San Donato, 5
Bologna, 40126
Italy

HOME PAGE: http://www.dm.unibo.it/~pascucci

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