Local Stochastic Volatility with Jumps: Analytical Approximations
Int. J. Theor. Appl. Finan. 16, 1350050, 2013, DOI: org/10.1142/S0219024913500507
38 Pages Posted: 5 Jun 2012 Last revised: 19 Nov 2016
Date Written: August 16, 2013
We present new approximation formulas for local stochastic volatility models, possibly including Lévy jumps. Our main result is an expansion of the characteristic function which is worked out in the Fourier space. Combined with standard Fourier methods, our result provides efficient and accurate formulas for the prices and the Greeks of plain vanilla options. We finally provide numerical results to illustrate the accuracy with real market data.
Keywords: local stochastic volatility, Lévy process, analytical approximation, characteristic function, partial integro-differential equation, Fourier methods
JEL Classification: G13
Suggested Citation: Suggested Citation