From Local Volatility to Local L¶evy Models

نویسندگان

  • Peter Carr
  • Dilip B. Madan
  • Robert H Smith
چکیده

We de ̄ne the class of local L¶evy processes. These are L¶evy processes time changed by an inhomogeneous local speed function. The local speed function is a deterministic function of time and the level of the process itself. We show how to reverse engineer the local speed function from traded option prices of all strikes and maturities. The local L¶evy processes generalize the class of local volatility models. Closed forms for local speed functions for a variety of cases are also presented. Numerical methods for recovery are also described.

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تاریخ انتشار 2004