Small-time asymptotics for fast mean-reverting stochastic volatility models (Q453246)
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scientific article; zbMATH DE number 6083943
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| English | Small-time asymptotics for fast mean-reverting stochastic volatility models |
scientific article; zbMATH DE number 6083943 |
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Small-time asymptotics for fast mean-reverting stochastic volatility models (English)
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19 September 2012
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stochastic volatility
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multi-scale asymptotic
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large deviation principle
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implied volatility smile/skew
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The authors study stochastic volatility option-pricing models, where the maturity is small, but still large compared to the mean-reversion time of the stochastic volatility factor. The problem falls in the class of averaging or homogenization problems for nonlinear HJB-type equations where the fast variable lives in a noncompact space.NEWLINENEWLINEThe authors develop a general argument based on viscosity solutions which they apply to the two regimes studied in the paper. They derive a large deviation principle and deduce asymptotic prices for out-of-the-money call and put options, and their corresponding implied volatilities.
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