Abstract
We propose a method for approximating equivalent local volatility functions of stochastic volatility models. Enlightened by the theory of generalized Wiener functionals proposed by Watanabe and Yoshida (1987, 1992), our key technique is to propose a closed-form expansion of conditional expectations involving marginal distributions generated by stochastic differential equations. A numerical test and an illustration of application are provided to demonstrate the efficiency of our approach.
Publisher
Cambridge University Press (CUP)
Subject
Industrial and Manufacturing Engineering,Management Science and Operations Research,Statistics, Probability and Uncertainty,Statistics and Probability
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