American Institute of Mathematical Sciences

September  2018, 8(3&4): 625-635. doi: 10.3934/mcrf.2018026

Recovery of local volatility for financial assets with mean-reverting price processes

 Institute of Scientific Computation and Financial Data Analysis, Shanghai University of Finance and Economics, Shanghai 200433, China

Received  October 2017 Revised  May 2018 Published  September 2018

Fund Project: This research is supported in part by Natural Science Foundation of China under Grant 71771142, 71271127

The discussion focuses on the recovery of local volatility from market data for Schwartz(1997) model. It is formulated as an inverse parabolic problem, and the necessary condition for determining the local volatility is derived under the optimal control framework. An iterative algorithm is provided to solve the optimality system and a synthetic numerical example is provided to illustrate the effectiveness.

Citation: Qihong Chen. Recovery of local volatility for financial assets with mean-reverting price processes. Mathematical Control & Related Fields, 2018, 8 (3&4) : 625-635. doi: 10.3934/mcrf.2018026
References:

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References:
Local volatility fitting result
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