Why are quadratic normal volatility models analytically tractable?

Details Why are quadratic normal volatility models analytically tractable? Why are quadratic normal volatility models analytically tractable?

2012-02-28

arxiv.org/abs/1202.6187v2

Economy

Quantitative Finance

Pricing of Securities

Improved presentation of results

Scientific paper

We discuss the class of "Quadratic Normal Volatility" models, which have drawn much attention in the financial industry due to their analytic tractability and flexibility. We characterize these models as the ones that can be obtained from stopped Brownian motion by a simple transformation and a change of measure that only depends on the terminal value of the stopped Brownian motion. This explains the existence of explicit analytic formulas for option prices within Quadratic Normal Volatility models in the academic literature.

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