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Implementation of Local Volatility in Piterbarg’s Framework

In: Advances in Cross-Section Data Methods in Applied Economic Research

Author

Listed:
  • Alexis Levendis

    (University of Johannesburg)

  • Pierre Venter

    (University of Johannesburg)

Abstract

The stock market crash of 1987 proved to be a major turning point in financial markets as the Black–Scholes model assumption of constantLevendis, Alexis volatility was violated. A new phenomena known as the “volatility smile” were observed post the crisis, and this has been one focus area of quantitative finance researchers over the past coupleVenter, Pierre of decades. Almost 20 years after the crash now known as “Black Monday”, the 2007 global financial crisis occurred which showed that numerous other factors need to be considered when pricing derivatives. Collateral, for instance, is considered by Piterbarg. In this paper, we present a local volatility model used to price arithmetic Asian call options in the Piterbarg framework.

Suggested Citation

  • Alexis Levendis & Pierre Venter, 2020. "Implementation of Local Volatility in Piterbarg’s Framework," Springer Proceedings in Business and Economics, in: Nicholas Tsounis & Aspasia Vlachvei (ed.), Advances in Cross-Section Data Methods in Applied Economic Research, chapter 0, pages 507-521, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-38253-7_33
    DOI: 10.1007/978-3-030-38253-7_33
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