Marginal density expansions for diffusions and stochastic volatility. I: Theoretical foundations

DOI10.1002/CPA.21478MaRDI QIDQ5746482zbMATH OpenOpenAlexFDO

Authors Jean-Dominique Deuschel, Peter Friz, Antoine Jacquier, S. Violante

Publication date 18 February 2014

Published in Communications on Pure and Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1111.2462

zbMATH Keywords

control problemdensity expansionHamiltonian ODEhypoelliptic diffusionHörmander conditionnot-in-cut-locus conditionshort-timesmall-noise

Mathematics Subject Classification ID

Ordinary differential equations and systems with randomness (34F05) Hypoelliptic equations (35H10) Diffusion processes and stochastic analysis on manifolds (58J65) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Diffusion processes (60J60)

Abstract: Density expansions for hypoelliptic diffusions $(X^1,\mathrm{...},X^d)$ are revisited. In particular, we are interested in density expansions of the projection $(X_T^1,\mathrm{...},X_T^l)$, at time $T>0$, with $lleqd$. Global conditions are found which replace the well-known "not-in-cutlocus" condition known from heat-kernel asymptotics. Our small noise expansion allows for a "second order" exponential factor. As application, new light is shed on the Takanobu--Watanabe expansion of Brownian motion and Levy's stochastic area. Further applications include tail and implied volatility asymptotics in some stochastic volatility models, discussed in a compagnion paper.

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Cited in

(32)

• Black-Scholes in a CEV random environment
• Curvature terms in small time heat kernel expansion for a model class of hypoelliptic Hörmander operators
• Density estimates and short-time asymptotics for a hypoelliptic diffusion process
• Precise asymptotics: robust stochastic volatility models
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