Estimation of local volatilities in a generalized Black-Scholes model

Abstract

This paper studies a parameter estimation problem for a generalized Black-Scholes equation, which is used for option pricing. In estimating the volatility function from a set of market observations, we use an implicit finite difference scheme. The function space parameter estimation convergence (FSPEC) is proved and numerical simulations were performed. (C) 2004 Elsevier Inc. All rights reserved.