The purpose of this document is to introduce implied, local and stochastic volatility, to review evidence of non-constant volatility, and to consider the implications for option pricing of alternative random or stochastic volatility models. We focus on continuous time diffusion models for the volatility, but we also briefly discuss certain classes of discrete time models, such as ARV or ARCH.
By Prof. Klaus Erich Schmitz Abe http://www.maths.ox.ac.uk/~schmitz/
Download Matlab version: Local_vs_Dupire.m
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