Local Volatility from American Options

Abstract

In this paper, we focus on short-time asymptotics for American options in the case of local and stochastic volatility models. As a by-product, we obtain an efficient algorithm for calibrating Dupire's local volatility to American options, starting from an arbitrage-free parametrization of a European implied volatility. This is illustrated by various numerical experiments.

Keywords: Local volatility model, stochastic volatility model, American options, calibration, discrete dividends