Questions tagged [local-volatility]
The local-volatility tag has no usage guidance.
-2
votes
0answers
21 views
Is there any simple approach to model quickly a vol surface dynamic? [closed]
I'm looking for a simple way to simulate a vol dynamic.
Is there any simple model out there?
Thanks for your help.
2
votes
2answers
205 views
Probability Density Function sign problem when using Call Price
Given the call price $C_t = e^{-\int_t^Tr(s)ds}\int (s-K)^{+}\phi_{S_T}(T,s)ds $
we know that $$\frac{dC}{dK}=-e^{-\int_t^Tr(s)ds}\int_K^{\infty} \phi_{S_T}(T,s)ds$$
Now when I use dirac delta ...
1
vote
1answer
96 views
Deriving Dupire's Volatility Formula : Why $\lim_{s \rightarrow \infty} (s-K) \frac{d}{ds} \big[ \sigma^2(T,s)s^2\phi(T,s)\big] = 0 $
In deriving Dupire's formula for the local volatility, using European call option, this is used in the integration by part :
$$\lim_{s \rightarrow \infty} (s-K) \frac{d}{ds} \Big[ \sigma^2(T,s) s^2\...
3
votes
2answers
89 views
Local volatility implied by implied vol surface
In his book volatility and correlation, Rebonato tries to explain intuitively the shape of local volatility surface (depending on stock level and time) from the implied volatility surface in the OTM ...
4
votes
2answers
223 views
What are the benefits of using Dupire model
I'm trying to understand what is the point of the local volatility model in practice. Rather than asking a question I will explain what is what for me hoping someone will spot where I'm wrong:
The ...
0
votes
1answer
94 views
how to price barrier option under local vol model using QuantLib
I use QuantLib in Python. Now I have implied volatility surface data. How can I get the local vol surface than using finite difference method to price a barrier option in QuantLib?
0
votes
1answer
73 views
Drift of Local Volatility Model - Dupire
i understand that the local volatility function can be computed from the implied volatility surface.(i.e there is no calibration to option prices, we just need the full implied volatility surface only)...
6
votes
2answers
180 views
Vega of exotic options
I'am wondering if there is a standard definition to the Vega of an exotic product when the underlying model is not Black-Scholes.
Let me give some examples :
What is the Vega if the price is ...
3
votes
0answers
88 views
Finite Difference with SVI Vol Model
I am attempting to implement a local vol pricing model in finite difference for equity index options.
I have followed Gatheral's Lectures and fitted an SVI Model bringing me to the following local ...
4
votes
1answer
99 views
Break even Levels Local volatility
I came across a presentation where it is stated that using a local volatility model the PnL of an option is
and
What does he mean by spot/vol correl = -100%?
1
vote
0answers
66 views
Dynamically adjusting the size of a Constant Range Bar (on an intraday fx chart)
Constant Range Bars (CRB) is a type of candlestick charting method that does not draw a new candle every unit of time (like every 1/5/15/30 minutes), but every time the range (high-low) of the ...
1
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0answers
28 views
Trying to understand Strike Adjusted Spread, can someone explain using a simple example?
I should start by saying that I am not a quant, I am someone interested in options but I perhaps lack the mathematics background to always follow along. I recently stumbled upon a terrific article ...
2
votes
0answers
103 views
Calibration of Cox-Ingersoll-Ross process that hits zero (Feller condition violation)
I'm considering a Cox-Ingersoll-Ross (CIR) process
$$
dx_{t} = \alpha\left(\theta - x_{t}\right)dt + \sigma \sqrt{x_{t}}\,dW_{t}\,,\qquad \alpha,\beta,\sigma > 0
$$
which by assumption has $2\...
0
votes
1answer
144 views
Forward Skew in the Local Volatility Model
How does the local volatility model cause a forward skew? How is this different to the skew observed for future tenors in the vol surface?#
Also how do LV models underestimate vol of vol?
2
votes
2answers
582 views
Problems with local volatility models (vs stochastic volatility models)
Why is pricing with local volatility models are problem with exotics, mainly due to "the volatility surface is the market's current view of volatility and this will change in the future meaning the ...
5
votes
2answers
500 views
Autocallable pricing under stochastic vs. local volatility
I am interest in the reason why an Autocallable (structured product) is cheaper under local volatility compared to stochastic volatility.
I thought this was due to the following:
when thinking in ...
5
votes
0answers
164 views
Dupire's calibration
I'm trying to implement a method for calibrating the local volatility model (Dupire's one). I'm working on the paper from Andreasen and Huge : Volatility interpolation (SSRN). Is this considered to be ...
1
vote
0answers
56 views
Local variance derivation by Gatheral
I've bought Gatheral's book on Local Volatility and I have troubles with understanding a part where he shows that local variance is a conditional expectation of instantaneous variance.
Why in the ...
3
votes
1answer
133 views
Proof for ATM delta with Local col
I am looking at a time-homogeneous local volatility model where
ATM implied volatility equals ATM local volatility: $\sigma_{imp}(S_0)=\sigma_{local}(S_0)$
ATM IV Skew = half of LV slope
In general $\...
1
vote
0answers
83 views
How to compute SABR's probability density function
I am trying to compute the probability density function of the forward rate implied by the SABR formula approximation in order to see how the density implied by the approximation has negative ...
6
votes
1answer
218 views
SSR definition in Bergomi in relation to sticky strike and sticky delta
In Bergomi [Stochastic Vol Modelling] (Sec. 2.5.2), in the section on surface dynamics, the following definition of the "Skew Stickiness Ratio" (SSR) is made:
$$ SSR = \dfrac{1}{\mathcal{S}_T}\frac{d\...
2
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0answers
169 views
Implied Vol skew VS Local Vol skew (as presented by Derman 1995)
I am reading Derman's article/notes regarding local volatilty:
http://www.emanuelderman.com/writing/entry/the-local-volatility-surface.
I am examining the graph on page 13.
The Implied volatility (...
1
vote
1answer
172 views
Mixture models of Stochastic Volatility and Local Volatility
As far as I can see on this website the stochastic volatilty models seem to be preferred to local volatility models, mainly due to the fact that stochastic volatility is 2D diffusive process whilst ...
3
votes
1answer
242 views
Local Volatility implementation
The Dupire equation is well-known and mentioned in thousands of articles. Although I could not find a lot of documentation about a consistent and proper way of implementing the formula (The difficulty ...
1
vote
2answers
425 views
Marking implied vol surface daily with sticky strike and sticky delta
Suppose that implied vol surfaces are calibrated once per month due to data restrictions (i.e. option data is only available at month end). How can a trading desk remark their vol surfaces on a daily ...
15
votes
0answers
403 views
Local Stochastic Volatility - Break even levels
In Chapter 12 of his excellent book Stochastic Volatility Modeling, Lorenzo Bergomi discusses the topic of local-stochastic volatility models (LSV).
As most of you are probably aware of, the idea is ...
5
votes
1answer
102 views
Motivation of the singular perturbation solution formulation for local volatility model
I am puzzled by the motivation of the particular choice of the (singular) perturbation method used in Equivalent Black Volatilities. Equation (A.6a) sets
$$\epsilon:= A(K)\ll 1.$$
What is the ...
0
votes
0answers
44 views
Local volatility equation for daily margining option data
I am trying calibrate the local volatility function to the index options. The formula's given in the books are for the option's which are premium paid upfront. The option that I am looking at are ...
5
votes
2answers
821 views
Local vol, stochastic vol, implied vol
I've been studying volatility modelling over past the few days; in particular, the connections between local vol, stochastic vol, implied vol. I've been reading Gatheral's book "The volatility surface"...
3
votes
0answers
111 views
Problem of negative local volatility:
Consider the displaced log-normal process: $$dS(t) = \lambda(t)(a(t)+b(t)S(t))dW(t), S(0) = S_0>0, $$ where $W(t)$ is a one-dimensional Brownian motion.
We suppose that $(\forall t \ge 0) : \...
3
votes
0answers
180 views
Ill-posed problem: Local volatility calibration. Regularization vs Smoothing
I have asked my question on Mathematics site of Stack Exchange but maybe I will get the answer rather here.
I am working on inverse problem - calibration of local volatility (financial application). ...
1
vote
1answer
170 views
Conditional expectation and Dirac delta function
In the proof of Dupire equation we end up with an identity involving the Dirac delta function.
How to prove that
$$\dfrac{E[\...
0
votes
1answer
106 views
Why/When local volatility is preferred over implied distribution sampling?
Let's say we have an option whose payoff is path dependent (let's say it's asian option with observations every month). Then why these are usually priced with local vol instead of sampling from ...
6
votes
2answers
317 views
Difference between Local Vol and Copula
Let's assume we have ATM European call on a basket of two stocks and price it with:
1) Multivariate Local Vol with constant correlation
2) Gaussian copula
Assuming we use the same correlation ...
0
votes
1answer
250 views
Approximations for Quanto Options pricing
On page 4 of this paper, the auhor provides two good approximations for quanto options pricing: $V^d_{black}$ and $V^d_{blackATM}$. These approximations consist of using the ATM and/or stike ...
5
votes
1answer
381 views
Proof of arbitrage-free implied volatility surface in relation to local volatility surfaces
I'm looking for proof of the following statement:
"The existence of an arbitrage-free implied volatility surface is
equivalent to the existence of a well-defined local volatility
surface."
0
votes
0answers
155 views
Dupire Formula for $T = 0$?
In Dupire's formula for $\sigma(S,T)$ ... what exactly is $T$?
For example, let's say we are at time 0. What in the world is $\sigma(S_0, 0)$? It is undefined, no?
So in the evolution of $S$, what ...
2
votes
1answer
475 views
Methods to compute Local Volatility surface and price
I am trying to wrap my head around how exactly Dupire's formula is implemented in practice.
We need $\sigma(S,T)$ for every possible $S$ and $T$. If we had that, then we can just run a monte carlo ...
3
votes
0answers
91 views
Is the local volatility linear if smile is linear?
Assume $dS = S_t\sigma(S_t,t)dW$.
Given a implied volatility smile which is linear in, say, $(K - S_0)$, (we know its intercept and slope), we wish to calibrate $\sigma(S_t, t)$ to it. Will it too be ...
1
vote
0answers
35 views
Reference request: local volatility and time-dependent volatility
Is there a good practitioners guide to time-dependent and local volatility models?
0
votes
0answers
382 views
Dupire's formula explanation
In Stochastic Volatility Modeling (Lorenzo Bergomi) the Dupire's formula is:
$\sigma (t,S)^2$ $=$ $2$${dC\over dT}$ $+$ $qC$ $+(r-q)K$${dC \over dK}$ $x$ ${1 \over K^2 {d^2C \over dK^2}}$
with $K=S$...
1
vote
1answer
238 views
Confusion about CEV model
Under the CEV model the stock price has the following dynamics:
$dS_t=\mu S_tdt+\sigma S_t^\gamma dW_t$, where $\sigma\geq0, $ $\gamma\geq0$.
According to Wikipedia, if $\gamma <1$ the ...
2
votes
0answers
88 views
from local volatility function to implied volatility for a given strike
Assuming we know the local volatility function σ(S,t) for all S and t, how can we recover the corresponding implied volatility for a given strike K (and the other necessary parameters, S, r, T, t...)? ...
2
votes
0answers
92 views
Dupire equation at T = 0
Is Dupire's equation defined when the T input (the expiration) is equal to 0 (the current time)?
If it's not, how would you determine an appropriate local volatility to use at that time when ...
1
vote
2answers
1k views
pricing using dupire local volatility model
I am reading about Dupire local volatility model and have a rough idea of the derivation. But I can't reconcile the local volatility surface to pricing using geometric brownian motion process. If I'm ...
5
votes
4answers
1k views
Downward sloping smile in normal model
We consider an stock price $S$ following a normal model: $dS_t = \sigma dW_t$
We can write this as $\frac{dS_t}{S_t}=\frac{\sigma}{S_t}dW_t$
Hence we can see that $S$ follows a "log-normal" ...
1
vote
0answers
392 views
Code for quasi-Gaussian model (Cheyette model)
I'm looking into the quasi-Gaussian model with linear local volatility as explained by Andersen and Piterbarg (Interest Rate Modeling, Volume 2). I'm trying to calibrate this model and implement it. I ...
2
votes
2answers
654 views
Pricing variance swaps using Monte Carlo
For pricing variance swaps there is the well-known formula as sum of OTM options weighted by the inverse of the squared strike (see e.g. here).
Would it also be valid to derive the local-volatility ...
2
votes
0answers
76 views
Implied volatility
I have a question about calculating the implied vol. Assuming the implied vol that a option will expire in 1 day is $\sigma_1$, and the implied vol that the option will expire in 2 days is $\sigma_2$. ...
1
vote
2answers
732 views
Implied Volatility as proxy for instantaneous volatility
In many papers and book I have found a reasoning that it is well summarized in this paper as
"The first proxy we use is an unadjusted Black-Scholes proxy in which the implied volatility of a short-...
