Quantitative Finance
F-series
Date:
Number:CARF-F-427
An approximation formula for normal implied volatility under general local stochastic volatility models (Forthcoming in Journal of Futures Markets)
Abstract
We approximate normal implied volatilities by means of an asymp-
totic expansion method. The contribution of this paper is twofold:
to our knowledge, this paper is the rst to provide a uni ed approx-
imation method for the normal implied volatility under general local
stochastic volatility models. Second, we compared our method with
the Monte-Carlo simulations by using the parameters calibrated to the
actual market data and con rmed the accuracy.