Convergence of the fixed-point iteration for the Bass Local Volatility model

Speaker Dr. Gudmund Pammer, Dept. of Mathematics, ETH Zürich

Abstract: The Bass local volatility model introduced by Backhoff-Veraguas–Beiglböck–Huesmann–Källblad is a Markov model perfectly calibrated to vanilla options at finitely many maturities, that approximates the Dupire local volatility model. Conze and Henry-Labordère show that its calibration can be achieved by solving a fixed-point nonlinear integral equation. We complement the analysis and show, under suitable assumptions, existence and uniqueness of the solution to this equation, and establish that the fixed-point iteration scheme converges at linear rate.

The talk is based on joint work with Beatrice Acciaio and Antonio Marini.