Recovering the time-dependent volatility in jump-diffusion models from nonlocal price observations (Q2128477)

In the paper the authors consider pricing an option in a jump-diffusion model with time-dependent volatility of the form \[ dS = \mu S dt + \sigma(t) S dW + (\eta-1)S dq \] As the examples of such models they use Merton model and Kou model. The problem they try to solve is how to obtain the volatility function \(\sigma(t)\) given the observation of European option prices. The authors solve this by minimizing a functional based on average option premium (i.e. the average of option prices with different prices of underlying asset but the same maturity and strike price). In the final section the authors provide an algorithm to calculate the volatilty function based on the finite difference approximations. For the entire collection see [Zbl 1484.65002].