%0 Journal Article
%T How to make Dupire's local volatility work with jumps
%A Peter K. Friz
%A Stefan Gerhold
%A Marc Yor
%J Quantitative Finance
%D 2013
%I arXiv
%X There are several (mathematical) reasons why Dupire's formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note we attempt to explain why. In particular, we propose a regularization procedure of the option data so that Dupire's local vol diffusion process recreates the correct option prices, even in manifest presence of jumps.
%U http://arxiv.org/abs/1302.5548v1