Towards a self-consistent theory of volatility |
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| Authors: | Pierre-Louis Lions Jean-Michel Lasry |
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| Institution: | aCEREMADE – UMR C.N.R.S. 7534, Université Paris 9 – Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France;bCollège de France, 11, place Marcelin Berthelot, 75005 Paris, France;cCALYON, 9, Quai du Président Paul Doumer, 92920 Paris-La Défense Cedex, France |
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| Abstract: | In this paper, we propose a new theory for the formation of volatility which takes into account the influence of option hedging on the assets price dynamics. By analogy with statistical mechanics, we build a self-consistent equation for the volatility, we show it is well-posed and we explain how it can be solved. |
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| Keywords: | Volatility Option hedging Pricing |
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