Local Variance Gamma and Explicit Calibration to Option Prices
In some options markets (e.g. commodities), options are listed with only a single maturity for each underlying. In others, (e.g. equities, currencies), options are listed with multiple maturities. In this paper, we provide an algorithm for calibrating a pure jump Markov martingale model to match the market prices of European options of multiple strikes and maturities. This algorithm only requires solutions of several one-dimensional root-search problems, as well as application of elementary functions. We show how to construct a time-homogeneous process which meets a single smile, and a piecewise time-homogeneous process which can meet multiple smiles.
Year of publication: |
2013-08
|
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Authors: | Carr, Peter ; Nadtochiy, Sergey |
Institutions: | arXiv.org |
Saved in:
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