Stable reconstruction of the volatility in a regime-switching local volatility model
Analysis of PDEs
2017-10-10 v1
Abstract
Prices of European call options in a regime-switching local volatility model can be computed by solving a parabolic system which generalises the classical Black and Scholes equation, giving these prices as functionals of the local volatilities. We prove Lipschitz stability for the inverse problem of determining the local volatilities from quoted call option prices for a range of strikes, if the calls are indexed by the different states of the continuous Markov chain which governs the regime switches.
Keywords
Cite
@article{arxiv.1710.03172,
title = {Stable reconstruction of the volatility in a regime-switching local volatility model},
author = {Mourad Bellassoued and Raymond Brummelhuis and Michel Cristofol and Eric Soccorsi},
journal= {arXiv preprint arXiv:1710.03172},
year = {2017}
}