The Quadratic Local Variance Gamma Model: an arbitrage-free interpolation of class C3 for option prices
Fuente:
arXiv
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| Natura: | Preprint |
| Pubblicazione: |
2023
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| _version_ | 1866915252633862144 |
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| author | Floc'h, Fabien Le |
| author_facet | Floc'h, Fabien Le |
| contents | This paper generalizes the local variance gamma model of Carr and Nadtochiy, to a piecewise quadratic local variance function. The formulation encompasses the piecewise linear Bachelier and piecewise linear Black local variance gamma models. The quadratic local variance function results in an arbitrage-free interpolation of class C3. The increased smoothness over the piecewise-constant and piecewise-linear representation allows to reduce the number of knots when interpolating raw market quotes, thus providing an interesting alternative to regularization while reducing the computational cost. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2305_13791 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | The Quadratic Local Variance Gamma Model: an arbitrage-free interpolation of class C3 for option prices Floc'h, Fabien Le Computational Finance Mathematical Finance Pricing of Securities Risk Management This paper generalizes the local variance gamma model of Carr and Nadtochiy, to a piecewise quadratic local variance function. The formulation encompasses the piecewise linear Bachelier and piecewise linear Black local variance gamma models. The quadratic local variance function results in an arbitrage-free interpolation of class C3. The increased smoothness over the piecewise-constant and piecewise-linear representation allows to reduce the number of knots when interpolating raw market quotes, thus providing an interesting alternative to regularization while reducing the computational cost. |
| title | The Quadratic Local Variance Gamma Model: an arbitrage-free interpolation of class C3 for option prices |
| topic | Computational Finance Mathematical Finance Pricing of Securities Risk Management |
| url | https://arxiv.org/abs/2305.13791 |