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

Andrea Pascucci

University of Bologna - Department of Mathematics

Stefano Pagliarani

DEAMS, Università di Trieste

Date Written: May 4, 2011

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.

Keywords: option pricing, analytical approximation, local volatility

JEL Classification: G00, G13

Suggested Citation

Pascucci, Andrea and Pagliarani, Stefano, Analytical Approximation of the Transition Density in a Local Volatility Model (May 4, 2011). Pagliarani, S. & Pascucci, A. centr.eur.j.math. (2012) 10: 250. doi:10.2478/s11533-011-0115-y. Available at SSRN: https://ssrn.com/abstract=1856043 or http://dx.doi.org/10.2139/ssrn.1856043

Andrea Pascucci (Contact Author)

University of Bologna - Department of Mathematics ( email )

Piazzadi Porta San Donato, 5
Bologna, 40126
Italy

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

Stefano Pagliarani

DEAMS, Università di Trieste ( email )

Via Valerio n. 4/1
Trieste
Italy

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

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