Explicit implied volatilities for multifactor local-stochastic volatility models

DOI10.1111/MAFI.12105zbMATH Open1422.91713arXiv1306.5447OpenAlexW3126075830MaRDI QIDQ5283408FDOQ5283408

Authors: Matthew Lorig, Stefano Pagliarani, Andrea Pascucci 

Publication date: 21 July 2017

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

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.

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

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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)

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Cited In (40)

• A volatility-of-volatility expansion of the option prices in the SABR stochastic volatility model
• IMPLIED AND LOCAL VOLATILITIES UNDER STOCHASTIC VOLATILITY
• Analytical Approximations of BSDEs with Nonsmooth Driver
• Forward implied volatility expansion in time-dependent local volatility models
• Options on bonds: implied volatilities from affine short-rate dynamics
• An improved asymptotics of implied volatility in the gatheral model
• The averaging principle for non-autonomous slow-fast stochastic differential equations and an application to a local stochastic volatility model
• The implied Sharpe ratio
• Asymptotics for $$d$$ -Dimensional Lévy-Type Processes
• The equivalent constant-elasticity-of-variance (CEV) volatility of the stochastic-alpha-beta-rho (SABR) model
• Unbiasing and robustifying implied volatility calibration in a cryptocurrency market with large bid-ask spreads and missing quotes
• Second order multiscale stochastic volatility asymptotics: stochastic terminal layer analysis and calibration
• The complete Gaussian kernel in the multi-factor Heston model: option pricing and implied volatility applications
• Closed-form Arrow-Debreu pricing for the Hull-White short rate model
• Asymptotic expansion formula of option price under multifactor Heston model
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• Analytical expansions for parabolic equations
• Indifference prices and implied volatilities
• Second order expansion for implied volatility in two factor local stochastic volatility models and applications to the dynamic \(\lambda\)-SABR model
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• Optimal static quadratic hedging
• Analytical approximation of the transition density in a local volatility model
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• Implied Volatility from Local Volatility: A Path Integral Approach
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