-hypergeometric uncertain volatility models and their connection to 2BSDEs

DOI10.21915/BIMAS.2021304zbMATH Open1483.91239arXiv2108.06965MaRDI QIDQ5033264FDOQ5033264

Authors: Zaineb Mezdoud, Carsten Hartmann, Mohamed Riad Remita, Omar Kebiri 

Publication date: 22 February 2022

Published in: Bulletin of the Institute of Mathematics Academia Sinica NEW SERIES (Search for Journal in Brave)

Abstract: In this article we propose a $alpha$-hypergeometric model with uncertain volatility (UV) where we derive a worst-case scenario for option pricing. The approach is based on the connexion between a certain class of nonlinear partial differential equations of HJB-type (G-HJB equations), that govern the nonlinear expectation of the UV model and that provide an alternative to the difficult model calibration problem of UV models, and second-order backward stochastic differential equations (2BSDEs). Using asymptotic analysis for the G-HJB equation and the equivalent 2BSDE representation, we derive a limit model that provides an accurate description of the worst-case price scenario in cases when the bounds of the UV model are slowly varying. The analytical results are tested by numerical simulations using a deep learning based approximation of the underlying 2BSDE.

Full work available at URL: https://arxiv.org/abs/2108.06965

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zbMATH Keywords

uncertain volatility model\(\alpha\)-hypergeometric stochastic volatility model2BSDEdeep learning based discretisation of 2BSDE

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (1)

• Uncertain volatility models with stochastic bounds

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