Abstract
This article presents simple formulae for the local variance gamma model of Carr and Nadtochiy (2017), extended with a piecewise-linear local variance function. The new formulae allow us to calibrate the model efficiently to market option quotes. On a small set of quotes, exact calibration is achieved under one millisecond. This effectively results in an arbitrage-free interpolation of class C2. The article proposes a good regularization when the quotes are noisy. Finally, it puts in evidence an issue of the model at-the-money, which is also present in the related one-step finite difference technique of Andreasen and Huge (2011), and gives two solutions for it.
Original language | English |
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Pages (from-to) | 64-86 |
Number of pages | 23 |
Journal | Journal of Derivatives |
Volume | 28 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2021 |
Keywords
- Options
- Statistical methods