H\"older regularity and series representation of a class of stochastic volatility models

arXiv1208.1100MaRDI QIDQ6234860FDOQ6234860

Authors: Antoine Ayache, Qidi Peng 

Publication date: 6 August 2012

Abstract: Let $Phi:RightarrowR$ be an arbitrary continuously differentiable deterministic function such that $|Phi|+|Ph{i}^{\prime }|$ is bounded by a polynomial. In this article we consider the class of stochastic volatility models in which ${Z(t)}_{tin[0,1]}$, the logarithm of the price process, is of the form $Z(t)=in{t}_0^{t}Phi(X(s))dW(s)$, where ${X(s)}_{sin[0,1]}$ denotes an arbitrary centered Gaussian process whose trajectories are, with probability 1, H"older continuous functions of an arbitrary order $alphain(1/2,1]$, and where ${W(s)}_{sin[0,1]}$ is a standard Brownian motion independent on ${X(s)}_{sin[0,1]}$. First we show that the critical H"older regularity of a typical trajectory of ${Z(t)}_{tin[0,1]}$ is equal to 1/2. Next we provide for such a trajectory an expression as a random series which converges at a geometric rate in any H"older space of an arbitrary order $gamma<1/2$; this expression is obtained through the expansion of the random function $smapstoPhi(X(s))$ on the Haar basis. Finally, thanks to it, we give an efficient iterative simulation method for ${Z(t)}_{tin[0,1]}$.

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