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Positive Stochastic Collocation for the Collocated Local Volatility Model

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  • Fabien Le Floc'h
  • Cornelis W. Oosterlee

Abstract

This paper presents how to apply the stochastic collocation technique to assets that can not move below a boundary. It shows that the polynomial collocation towards a lognormal distribution does not work well. Then, the potentials issues of the related collocated local volatility model (CLV) are explored. Finally, a simple analytical expression for the Dupire local volatility derived from the option prices modelled by stochastic collocation is given.

Suggested Citation

  • Fabien Le Floc'h & Cornelis W. Oosterlee, 2021. "Positive Stochastic Collocation for the Collocated Local Volatility Model," Papers 2109.02405, arXiv.org.
    • Handle: RePEc:arx:papers:2109.02405
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    File URL: http://arxiv.org/pdf/2109.02405
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