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

Publication date 30 September 2022

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) = i n t_{0}^{i} n f t y e^{- f r a c u^{2} 2 T} g (u) d u

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

| I m (u) | < p i

. 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

s i g m a_{0} o i n f t y

at fixed

o m e g a = 1

, or the small vol-of-vol limit

o m e g a o 0

limit at fixed

o m e g a s i g m a_{0}

, the short maturity

T

-expansion for the implied volatility has a finite convergence radius

T_{c} = f r a c 1.32 o m e g a s i g m a_{0}

.

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