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Journal Articles Mathematical Control and Related Fields Year : 2020

Stable reconstruction of the volatility in a regime-switching local-volatility model

Abstract

Prices of European call options in a regime-switching local-volatility model can be computed by solving a parabolic system which generalizes the classical Black and Scholes equation, giving these prices as functionals of the local-volatilities. We prove Lipschitz stability for the inverse problem of determining the local-volatilities from quoted call option prices for a range of strikes, if the calls are indexed by the different states of the continuous Markov chain which governs the regime switches.
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Dates and versions

hal-03130973 , version 1 (04-02-2021)

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Mourad Bellassoued, Raymond Brummelhuis, Michel Cristofol, Eric Soccorsi. Stable reconstruction of the volatility in a regime-switching local-volatility model. Mathematical Control and Related Fields, 2020, 10 (1), pp.189-215. ⟨10.3934/mcrf.2019036⟩. ⟨hal-03130973⟩
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