Saved in:
| Main Author: | |
|---|---|
| Format: | Preprint |
| Published: |
2024
|
| Subjects: | |
| Online Access: | https://arxiv.org/abs/2411.15053 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
Table of Contents:
- We introduce a Markov-functional approach to construct local volatility models that are calibrated to a discrete set of marginal distributions. The method is inspired by and extends the volatility interpolation of Bass (1983) and Conze and Henry-Labordère (2022). The method is illustrated with efficient numerical algorithms in the cases where the constructed local volatility functions are: (1) time-homogeneous between or (2) continuous across, the successive maturities. The step-wise time-homogeneous construction produces a parsimonious representation of the local volatility term structure.