Comparison results for stochastic volatility models via coupling

DOI10.1007/S00780-008-0083-7MaRDI QIDQ2430255zbMATH OpenOpenAlexFDO

Authors David Hobson

Publication date 6 April 2011

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00780-008-0083-7

zbMATH Keywords

stochastic volatilitytime changeuniformly integrable martingale

Mathematics Subject Classification ID

Sample path properties (60G17) Random fields (60G60) Derivative securities (option pricing, hedging, etc.) (91G20) Financial applications of other theories (91G80)

Review text

The motivation for the authors comes from the fact that the famous Black-Scholes model, or the geometric Brownian motion, is universally acknowledged, but fails to capture many observed features of financial data. For instance, the volatility of stock prices changes with time and more importantly from the derivative pricing perspective, the market does not price consistently in the Black-Scholes model. The authors consider in their paper stochastic volatility models. Their aim is to investigate the properties of such models, and to find out to what extent and with regard to which models the properties of the geometric Brownian motion carry over to a stochastic volatility setting. They are particularly eager to answer questions of the form: can the process hit zero; does the discounted price process converge; are discounted prices true martingales; are option prices convex in the underlying; are the option prices monotonic in the model parameters? The main results of this paper are a construction of the solution to a stochastic volatility model, the application of this construction to derive results describing when the discounted asset price can hit zero, and when it is a martingale, and a comparison theorem for option prices in different stochastic volatility models. These theoretical results are augmented by the discussion of several examples, including both well-known models form the literature and the new models which illustrate the various phenomena.

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Cited in

(20)

• Approximate arbitrage-free option pricing under the SABR model
• Monotonicity of the value function for a two-dimensional optimal stopping problem
• Generalized arbitrage-free SVI volatility surfaces
• Monotonicity of prices in Heston model
• Arbitrage-free SVI volatility surfaces
• On the martingale property in stochastic volatility models based on time-homogeneous diffusions
• Functional analytic (ir-)regularity properties of SABR-type processes
• Outperforming the market portfolio with a given probability
• Large deviation principle for Volterra type fractional stochastic volatility models
• Dirichlet forms and finite element methods for the SABR model
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• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
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• Robustness of Delta Hedging in a Jump-Diffusion Model
• Bubbles, convexity and the Black-Scholes equation

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