Analytical Approximation of the Transition Density in a Local Volatility Model
Pagliarani, S. & Pascucci, A. centr.eur.j.math. (2012) 10: 250. doi:10.2478/s11533-011-0115-y
27 Pages Posted: 4 Jun 2011 Last revised: 17 Nov 2016
Date Written: May 4, 2011
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.
Keywords: option pricing, analytical approximation, local volatility
JEL Classification: G00, G13
Suggested Citation: Suggested Citation