First-order asymptotics of path-dependent derivatives in multiscale stochastic volatility environment

DOI10.1142/S0219024918500243zbMATH Open1398.91614arXiv1712.07320OpenAlexW2949354036WikidataQ129942299 ScholiaQ129942299MaRDI QIDQ4565075FDOQ4565075

Authors: Yuri F. Saporito 

Publication date: 7 June 2018

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: In this paper, we extend the first-order asymptotics analysis of Fouque et al. to general path-dependent financial derivatives using Dupire's functional Ito calculus. The main conclusion is that the market group parameters calibrated to vanilla options can be used to price to the same order exotic, path-dependent derivatives as well. Under general conditions, the first-order condition is represented by a conditional expectation that could be numerically evaluated. Moreover, if the path-dependence is not too severe, we are able to find path-dependent closed-form solutions equivalent to the fist-order approximation of path-independent options derived in Fouque et al. Additionally, we exemplify the results with Asian options and options on quadratic variation.

Full work available at URL: https://arxiv.org/abs/1712.07320

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zbMATH Keywords

path dependencemultiscale stochastic volatilityfunctional Itô calculus

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of stochastic analysis (to PDEs, etc.) (60H30)

Cites Work

• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• Functional Itō calculus and stochastic integral representation of martingales
• Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
• Multiscale Stochastic Volatility Asymptotics
• Functional Itô calculus
• Second order multiscale stochastic volatility asymptotics: stochastic terminal layer analysis and calibration
• Functional Itô calculus, path-dependence and the computation of Greeks
• Pricing Asian options with stochastic volatility
• Pricing derivatives on multiscale diffusions: an eigenfunction expansion approach

Cited In (1)

• Short Communication: Pricing Path-Dependent Derivatives under Multiscale Stochastic Volatility Models: A Malliavin Representation

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