A note on the option price and ‘Mass at zero in the uncorrelated SABR model and implied volatility asymptotics’

DOI10.1080/14697688.2021.1876908zbMATH Open1476.91179arXiv2011.00557OpenAlexW3147269542MaRDI QIDQ5014241FDOQ5014241

Authors: Jaehyuk Choi, Lixin Wu 

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: Gulisashvili et al. [Quant. Finance, 2018, 18(10), 1753-1765] provide a small-time asymptotics for the mass at zero under the uncorrelated stochastic-alpha-beta-rho (SABR) model by approximating the integrated variance with a moment-matched lognormal distribution. We improve the accuracy of the numerical integration by using the Gauss--Hermite quadrature. We further obtain the option price by integrating the constant elasticity of variance (CEV) option prices in the same manner without resorting to the small-strike volatility smile asymptotics of De Marco et al. [SIAM J. Financ. Math., 2017, 8(1), 709-737]. For the uncorrelated SABR model, the new option pricing method is accurate and arbitrage-free across all strike prices.

Full work available at URL: https://arxiv.org/abs/2011.00557

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zbMATH Keywords

CEV modelstochastic volatilityGauss-Hermite quadratureSABR model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Cites Work

• BENCHOP -- SLV: the BENCHmarking project in option pricing -- stochastic and local volatility problems
• Title not available (Why is that?)
• Exponential functionals of Brownian motion. I: Probability laws at fixed time
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• Exact simulation of the SABR model
• Modern SABR analytics. Formulas and insights for quants, former physicists and mathematicians
• Shapes of implied volatility with positive mass at zero

Cited In (6)

• Model-independent bounds for option prices -- a mass transport approach
• Approximate arbitrage-free option pricing under the SABR model
• Generalized uncorrelated SABR models with a high degree of symmetry
• The equivalent constant-elasticity-of-variance (CEV) volatility of the stochastic-alpha-beta-rho (SABR) model
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• Exact pricing and large-time asymptotics for the modified SABR model and the Brownian exponential functional

Uses Software

• BENCHOP

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