Explicit implied volatilities for multifactor local-stochastic volatility models

DOI10.1111/MAFI.12105MaRDI QIDQ5283408zbMATH OpenOpenAlexFDO

Authors Matthew Lorig, Stefano Pagliarani, Andrea Pascucci

Publication date 21 July 2017

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1306.5447

zbMATH Keywords

implied volatilitylocal-stochastic volatilityHestonCEVSABR

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Asymptotic approximations, asymptotic expansions (steepest descent, etc.) (41A60) Stochastic models in economics (91B70)

Abstract: We consider an asset whose risk-neutral dynamics are described by a general class of local-stochastic volatility models and derive a family of asymptotic expansions for European-style option prices and implied volatilities. Our implied volatility expansions are explicit; they do not require any special functions nor do they require numerical integration. To illustrate the accuracy and versatility of our method, we implement it under five different model dynamics: CEV local volatility, quadratic local volatility, Heston stochastic volatility, $3/2$ stochastic volatility, and SABR local-stochastic volatility.

Recommendations

• Asymptotics of implied volatility in local volatility models
• Second order expansion for implied volatility in two factor local stochastic volatility models and applications to the dynamic \(\lambda\)-SABR model
• Analytical approximations of local-Heston volatility model and error analysis
• Asymptotic expansion formula of option price under multifactor Heston model
• Asymptotics and calibration of local volatility models

Cites work

• scientific article; zbMATH DE number 3233089 (Why is no real title available?)
• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• A family of density expansions for Lévy-type processes
• Adjoint expansions in local Lévy models
• Analysis of Wiener functionals (Malliavin calculus) and its applications to heat kernels
• Analysis, Geometry, and Modeling in Finance
• Analytical expansions for parabolic equations
• Analytical formulas for a local volatility model with stochastic rates
• Asymptotics of implied volatility in local volatility models
• Asymptotics of implied volatility to arbitrary order
• Computing the implied volatility in stochastic volatility models
• Consistent modelling of VIX and equity derivatives using a \(3/2\) plus jumps model
• Derivatives of composite functions
• Equivalent Black volatilities
• Expansions asymptotiques pour équations paraboliques dégénérées
• From characteristic functions to implied volatility expansions
• How to make Dupire's local volatility work with jumps
• Local volatility in the Heston model: a Malliavin calculus approach
• Moment explosions in stochastic volatility models
• Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
• ON THE RELATIONSHIP BETWEEN THE CALL PRICE SURFACE AND THE IMPLIED VOLATILITY SURFACE CLOSE TO EXPIRY
• Options on realized variance by transform methods: a non-affine stochastic volatility model
• PDE and martingale methods in option pricing.
• SMALL-TIME ASYMPTOTICS FOR IMPLIED VOLATILITY UNDER THE HESTON MODEL
• Second order multiscale stochastic volatility asymptotics: stochastic terminal layer analysis and calibration
• Small-Time Asymptotics for an Uncorrelated Local-Stochastic Volatility Model
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• The Curious History of Faa di Bruno's Formula
• The exact smile of certain local volatility models
• The small-time smile and term structure of implied volatility under the Heston model
• The smile of certain Lévy-type models
• Time dependent Heston model
• Transform Analysis and Asset Pricing for Affine Jump-diffusions

Cited in

(39)

• Stochastic implied volatility. A factor-based model.
• The averaging principle for non-autonomous slow-fast stochastic differential equations and an application to a local stochastic volatility model
• An improved asymptotics of implied volatility in the gatheral model
• Asymptotics of the time-discretized log-normal SABR model: the implied volatility surface
• Closed-form Arrow-Debreu pricing for the Hull-White short rate model
• IMPLIED AND LOCAL VOLATILITIES UNDER STOCHASTIC VOLATILITY
• Optimal static quadratic hedging
• Analytical approximations of local-Heston volatility model and error analysis
• Closed-form implied volatility surfaces for stochastic volatility models with jumps
• The implied Sharpe ratio
• A volatility-of-volatility expansion of the option prices in the SABR stochastic volatility model
• The complete Gaussian kernel in the multi-factor Heston model: option pricing and implied volatility applications
• Small-time asymptotics under local-stochastic volatility with a jump-to-default: curvature and the heat kernel expansion
• Hermite expansion of transition densities and European option prices for multivariate diffusions with jumps
• The equivalent constant-elasticity-of-variance (CEV) volatility of the stochastic-alpha-beta-rho (SABR) model
• Stochastic local volatility models and the Wei-Norman factorization method
• Portfolio optimization under local-stochastic volatility: coefficient Taylor series approximations and implied Sharpe ratio
• Closed-form approximations with respect to the mixing solution for option pricing under stochastic volatility
• Forward implied volatility expansion in time-dependent local volatility models
• Analytical Approximations of BSDEs with Nonsmooth Driver
• Implied Volatility from Local Volatility: A Path Integral Approach
• Robust Numerical Calibration for Implied Volatility Expansion Models
• On error estimates for asymptotic expansions with Malliavin weights: application to stochastic volatility model
• Unbiasing and robustifying implied volatility calibration in a cryptocurrency market with large bid-ask spreads and missing quotes
• Asymptotic expansion formula of option price under multifactor Heston model
• Analytical expansions for parabolic equations
• Portfolio Benchmarking Under Drawdown Constraint and Stochastic Sharpe Ratio
• Second order multiscale stochastic volatility asymptotics: stochastic terminal layer analysis and calibration
• The exact smile of certain local volatility models
• Asymptotics for $$d$$ -Dimensional Lévy-Type Processes
• Options on bonds: implied volatilities from affine short-rate dynamics
• Pricing approximations and error estimates for local Lévy-type models with default
• Indifference prices and implied volatilities
• A novel Monte Carlo approach to hybrid local volatility models
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• Implied volatility in strict local martingale models
• SHORT-MATURITY ASYMPTOTICS FOR OPTION PRICES WITH INTEREST RATE EFFECTS
• Approximate solutions to second-order parabolic equations: evolution systems and discretization
• Second order expansion for implied volatility in two factor local stochastic volatility models and applications to the dynamic \(\lambda\)-SABR model

This page was built for publication: Explicit implied volatilities for multifactor local-stochastic volatility models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5283408)