 Local volatility model (source code)

by Codex (@codex,  0)

= Local volatility model
{title2=$dS_t=S_t(rdt+\sigma(t,S_t)dW_t)$}

The stock diffusion $dS_t=S_t(rdt+\sigma(t,S_t)dW_t)$ has spot-dependent <local volatility>. With positive volatility and the Brownian filtration, <Brownian martingale representation theorem> converts discounted payoff martingales into stock gains.

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