Related papers: Stochastic flows approach to Dupire's formula
We derive generalizations of Dupire formula to the cases of general stochastic drift and/or stochastic local volatility. First, we handle a case in which the drift is given as difference of two stochastic short rates. Such a setting is…
This paper addresses the approximation of the local volatility function in the Cheyette interest rate model. Its main contribution is an explicit analytical formula for approximating local volatility, derived by extending the classical…
A robust implementation of a Dupire type local volatility model is an important issue for every option trading floor. Typically, this (inverse) problem is solved in a two step procedure : (i) a smooth parametrization of the implied…
There are several (mathematical) reasons why Dupire's formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note we attempt to explain why. In particular,…
We introduce a notion of duality solution for a single or a system of transport equations in spaces of probability measures reminiscent of the viscosity solution notion for nonlinear parabolic equations. Our notion of solution by duality…
An idea for evaluating transition probabilities in chemical reaction systems is proposed, which is efficient for repeated calculations with various rate constants. The idea is based on duality relations; instead of direct time-evolutions of…
It is well known that in models with time-homogeneous local volatility functions and constant interest and dividend rates, the European Put prices are transformed into European Call prices by the simultaneous exchanges of the interest and…
We use a path integral approach for solving the stochastic equations underlying the financial markets, and we show the equivalence between the path integral and the usual SDE and PDE methods. We analyze both the one-dimensional and the…
The Bou\'e-Dupuis variational formula gives a representation for log Laplace transforms of bounded measurable functions of a finite dimensional Brownian motion on a compact time interval as an infimum of a suitable cost over a collection of…
Using key tools such as It\^o formula for general semi-martingales, moments estimates for L\'{e}vy-type stochastic integrals and properties of regular varying functions we find conditions under which solutions of stochastic differential…
We consider the problem of valuing a European option written on an asset whose dynamics are described by an exponential L\'evy-type model. In our framework, both the volatility and jump-intensity are allowed to vary stochastically in time…
The Black-Scholes model gives vanilla Europen call option prices as a function of the volatility. We prove Lipschitz stability in the inverse problem of determining the implied volatility, which is a function of the underlying asset, from a…
Langevin (stochastic differential) equations are routinely used to describe particle-laden flows. They predict Gaussian probability density functions (PDFs) of a particle's trajectory and velocity, even though experimentally observed…
After defining non-Gaussian L\'evy processes for two-sided time, stochastic differential equations with such L\'evy processes are considered. Solution paths for these stochastic differential equations have countable jump discontinuities in…
For a series of Markov processes we prove stochastic duality relations with duality functions given by orthogonal polynomials. This means that expectations with respect to the original process (which evolves the variable of the orthogonal…
By using a formulation of motion equations for a viscous (compressible) fluid flow in terms of the vorticity and the rate of expansion as the main fluid dynamical variables, an approximation model is established for compressible flows with…
We analyze the relative price change of assets starting from basic supply/demand considerations subject to arbitrary motivations. The resulting stochastic differential equation has coefficients that are functions of supply and demand. We…
We derive a forward partial integro-differential equation for prices of call options in a model where the dynamics of the underlying asset under the pricing measure is described by a -possibly discontinuous- semimartingale. A uniqueness…
We consider one-dimensional stochastic differential equations with jumps in the general case. We introduce new technics based on local time and we prove new results on pathwise uniqueness and comparison theorems. Our approach are very easy…
In this paper, we investigate the generalization of the Call-Put duality equality obtained in [1] for perpetual American options when the Call-Put payoff $(y-x)^+$ is replaced by $\phi(x,y)$. It turns out that the duality still holds under…