# Tag Info

## Hot answers tagged local-volatility

3

I know one article (download) that explaining how to calculate local vol surface from IV surface and also chapter 18 of this book is very good In this context. However you know that Dupire’s (1994) formula for local volatility is \begin{align} \sigma_L(k,T)=\sqrt\frac{\frac{\partial C}{\partial T}}{\frac{1}{2}K^2\frac{\partial^2 C}{\partial K^2}} \end{align} ...

2

One does not estimate the local volatility at a given $T$ and $K$. Instead, Dupire's formula actually gives $\sigma(T,K)$ for all $T$ and $K$. $$\sigma^2(t_0,S_0;T,K)= \frac{\frac{\partial C}{\partial T} + (r - q)K \frac{\partial C}{\partial K} + qC}{\frac{1}{2} K^2 \frac{\partial^2C}{\partial K^2}}$$ where $C(t_0,S_0;T,K)$ are the call prices for ...

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