Standard Article

Local Volatility Model

  1. Chiyan Luo,
  2. Xinming Liu

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf08007

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Luo, C. and Liu, X. 2010. Local Volatility Model. Encyclopedia of Quantitative Finance. .

Author Information

  1. Merrill Lynch & Co., Inc, New York, NY, USA

Publication History

  1. Published Online: 15 MAY 2010


In this article, the local volatility surface is presented as a general framework for equity derivatives modeling. In particular, efficient volatility calibration techniques with parametric local volatility models are presented, along with methodologies for handling discrete dividends and stochastic interest rates. The importance of these models is demonstrated in realistic pricing examples with data from the S&P 500 index options market.


  • equity derivatives;
  • volatility surface;
  • local volatility;
  • discrete dividend;
  • stochastic interest rate;
  • calibration;
  • Fokker–Planck equation;
  • variance swaps;
  • lookback options