Inverse problems in finance
Black-Scholes modelcalibrationDupire's equationgradient methodsill-posednessimplied volatilityinverse problemsKaczmarz methodNewton's methodvanilla options
Inverse problems for PDEs (35R30) Research exposition (monographs, survey articles) pertaining to game theory, economics, and finance (91-02) Software, source code, etc. for problems pertaining to game theory, economics, and finance (91-04) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Financial applications of other theories (91G80)
The paper is a survey of the mathematical and computational methods for inverse problems in finance. The work starts with an introduction to financial option pricing and the direct or inverse problems in finance. Then the author gives an introduction into the regularization of ill-posed problems, sketching the main recent developments in both linear and nonlinear theory. In the next section, there are presented some numerical approaches (Newton's method and some gradient methods) for the identification of the implied (constant) volatility in the Black-Scholes model. The problem of identifiability of local volatility is also tackled. The reported results (the uniqueness theorem and computational methods for the local volatility) are based on the Dupire's equation. The last section of the paper considers two types of approaches to the calibration of the local volatility for vanilla call options: gradient methods and a method based on the Dupire's equation. A Kaczmarz-type method is also employed to calibrate the local volatilities.NEWLINENEWLINEFor the entire collection see [Zbl 1272.91008].
- Calibration of the Local Volatility in a Generalized Black--Scholes Model Using Tikhonov Regularization
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- Recovery of the local volatility function using regularization and a gradient projection method
- Calibrating local volatility in inverse option pricing using the Levenberg-Marquardt method
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- Calibration of the Local Volatility in a Generalized Black--Scholes Model Using Tikhonov Regularization
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- Bayesian inference approach to inverse problems in a financial mathematical model
- Numerical identification of time-dependent volatility in European options with two-stage regime-switching
- Reconstructing local volatility using total variation
- On local regularization for an inverse problem of option pricing
- On decoupling of volatility smile and term structure in inverse option pricing
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