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The regularized implied local volatility equations -A new model to recover the volatility of underlying asset from observed market option price

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  • In this paper, we propose a new continuous time model to recover the volatility of underlying asset from observed market European option price. The model is a couple of fully nonlinear parabolic partial differential equations (see (34), (36)). As an inverse problem, the model is deduced from a Tikhonov regularization framework. Based on our method, the recovering procedure is stable and accurate. It is justified not only in theoretical proofs, but also in the numerical experiments.
    Mathematics Subject Classification: 35K85, 35R30, 49J20, 49J40, 49K20, 49K40.


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