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Quantitative Finance · Glossaire

Qu'est-ce que « Local volatility model » ?

Aussi appelé : local volatility

Definition 9.1 Derivatives and Volatility · Chapitre 9 — Local Volatility

In a local volatility model the underlying follows

dSt=(r−q)St dt+σloc(t,St)St dWtdS_t=(r-q)S_t\,dt+\sigma_{\mathrm{loc}}(t,S_t)S_t\,dW_t

under the risk-neutral measure, with a deterministic function σloc\sigma_{\mathrm{loc}}, its local volatility. The model is complete: the only source of risk is the spot, and every claim is replicated with the underlying.

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