Proof of non-convergence of the short-maturity expansion for the SABR model

DOI10.1080/14697688.2022.2071759zbMATH Open1500.91136arXiv2107.12439OpenAlexW3186854569WikidataQ113849298 ScholiaQ113849298MaRDI QIDQ5039635FDOQ5039635

Alan L. Lewis, Dan Pirjol

Publication date: 30 September 2022

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

Abstract: We study the convergence properties of the short maturity expansion of option prices in the uncorrelated log-normal ($$) SABR model. In this model the option time-value can be represented as an integral of the form $V(T)=in{t}_0^{i}nfty{e}^{-frac{u}^{2}2T}g(u)du$ with $g(u)$ a "payoff function" which is given by an integral over the McKean kernel $G(s,t)$. We study the analyticity properties of the function $g(u)$ in the complex $u$-plane and show that it is holomorphic in the strip $|Im(u)|<pi$. Using this result we show that the $T$-series expansion of $V(T)$ and implied volatility are asymptotic (non-convergent for any $T>0$). In a certain limit which can be defined either as the large volatility limit $sigm{a}_{0}oinfty$ at fixed $omega=1$, or the small vol-of-vol limit $omegao0$ limit at fixed $omegasigm{a}_0$, the short maturity $T$-expansion for the implied volatility has a finite convergence radius $T_c=frac1.32omegasigm{a}_0$.

Full work available at URL: https://arxiv.org/abs/2107.12439

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zbMATH Keywords

asymptotic expansionsstochastic volatilitysingularity analysissaddle point method

Mathematics Subject Classification ID

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

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Cited In (1)

• Asymptotics for the Laplace transform of the time integral of the geometric Brownian motion

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