Stochastic local volatility models and the Wei-Norman factorization method

  title={Stochastic local volatility models and the Wei-Norman factorization method},
  author={Julio Guerrero and Giuseppe Orlando},
  journal={Discrete \& Continuous Dynamical Systems - S},
In this paper, we show that a time-dependent local stochastic volatility (SLV) model can be reduced to a system of autonomous PDEs that can be solved using the heat kernel, by means of the Wei-Norman factorization method and Lie algebraic techniques. Then, we compare the results of traditional Monte Carlo simulations with the explicit solutions obtained by said techniques. This approach is new in the literature and, in addition to reducing a non-autonomous problem into an autonomous one, allows… 

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