with current European option prices is known as the local volatility func- tion. It is unlikely that Dupire, Derman and Kani ever thought of local volatil-. So by construction, the local volatility model matches the market prices of all European options since the market exhibits a strike-dependent implied volatility. Local Volatility means that the value of the vol depends on time (and spot) The Dupire Local Vol is a “non-parametric” model which means that it does not.
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Local volatility – Wikipedia
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From Wikipedia, the free encyclopedia. Sign up using Email and Password. This page was last edited on 9 Decemberat Time-invariant local volatilities are supposedly inconsistent with the dynamics of the equity index implied volatility surface,   but see Crepey, S Derman and Kani produced what is called an ” implied binomial tree “; with Neil Chriss they extended this to an implied trinomial tree.
I’m still not sure if I understand that correctly. The key continuous -time equations used in local volatility models were developed by Bruno Dupire in Mathematical Finance – Bachelier Locaal While your statement is correct, your conclusion is not.
options – pricing using dupire local volatility model – Quantitative Finance Stack Exchange
LocalVolatility 5, 3 13 So by construction, the local volatility model matches the market prices of all European contingent claims without the model dynamics depending on what strike or payoff function you are interested in. Since in local volatility models the volatility is a deterministic function of the random stock price, local volatility models are not very well used to price cliquet options or forward start optionswhose values depend specifically on the random nature of volatility itself.
If I have realized volatility different than implied, there volatilith no way I should get the same option prices as the market.
Home Locall Tags Users Unanswered. The concept of a local volatility was developed when Bruno Dupire  and Emanuel Derman and Iraj Kani  noted that there is a unique diffusion process consistent with the risk neutral densities derived from the market prices of European options.
They used this function at each node in a binomial options pricing model. In the simplest model i.
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The general non-parametric approach by Dupire is however problematic, as one needs to arbitrarily pre-interpolate the input implied volatility surface before lkcal the method. Archived from the original PDF on This model is used to calculate exotic option valuations which are consistent with observed prices of vanilla options. International Journal of Theoretical and Applied Finance. Unlocking the Information in Index Options Prices”.