Small-time asymptotics for basket options -- the bivariate SABR model and the hyperbolic heat kernel on H^3

DOI10.1137/15M1029795zbMATH Open1345.60031OpenAlexW3099811162MaRDI QIDQ3188151FDOQ3188151

Authors Martin Forde, Hongzhong Zhang

Publication date 17 August 2016

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1603.02896

zbMATH Keywords

large deviationsbasket optionsstochastic volatilityheat kernelimplied volatilitysmall-time asymptoticsSABR model

Mathematics Subject Classification ID

Large deviations (60F10) Diffusion processes (60J60) Limit theorems in probability theory (60F99) Transition functions, generators and resolvents (60J35) Financial applications of other theories (91G80)

Abstract: We compute a sharp small-time estimate for the price of a basket call under a bi-variate SABR model with both $$ parameters equal to $1$ and three correlation parameters, which extends the work of Bayer,Friz&Laurence [BFL14] for the multivariate Black-Scholes flat vol model. The result follows from the heat kernel on hyperbolic space for $n=3$ combined with the Bellaiche [Bel81] heat kernel expansion and Laplace's method, and we give numerical results which corroborate our asymptotic formulae. Similar to the Black-Scholes case, we find that there is a phase transition from one "most-likely" path to two most-likely paths beyond some critical $K^{\ast }$.

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(3)

• On the probability density function of baskets
• A general valuation framework for SABR and stochastic local volatility models
• Primal-Dual Active-Set Method for the Valuation Of American Exchange Options

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