New solvable stochastic volatility models for pricing volatility derivatives

DOI10.1007/S11147-012-9082-0zbMATH Open1296.91263arXiv1205.3550OpenAlexW2168907566MaRDI QIDQ744402FDOQ744402

Authors: Andrey Itkin 

Publication date: 25 September 2014

Published in: Review of Derivatives Research (Search for Journal in Brave)

Abstract: Classical solvable stochastic volatility models (SVM) use a CEV process for instantaneous variance where the CEV parameter $gamma$ takes just few values: 0 - the Ornstein-Uhlenbeck process, 1/2 - the Heston (or square root) process, 1- GARCH, and 3/2 - the 3/2 model. Some other models were discovered in cite{Labordere2009} by making connection between stochastic volatility and solvable diffusion processes in quantum mechanics. In particular, he used to build a bridge between solvable (super)potentials (the Natanzon (super)potentials, which allow reduction of a Schr"{o}dinger equation to a Gauss confluent hypergeometric equation) and existing SVM. In this paper we discuss another approach to extend the class of solvable SVM in terms of hypergeometric functions. Thus obtained new models could be useful for pricing volatility derivatives (variance and volatility swaps, moment swaps).

Full work available at URL: https://arxiv.org/abs/1205.3550

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zbMATH Keywords

optionsclosed-form solutionLie symmetrypricingvolatility derivativesstochastic volatility modelvariance swap

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic models in economics (91B70)

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Cited In (12)

• Lie symmetry methods for local volatility models
• The \(\alpha\)-hypergeometric stochastic volatility model
• Solvable local and stochastic volatility models: supersymmetric methods in option pricing
• Stochastic elasticity of vol-of-vol and pricing of variance swaps
• Optimal investment and reinsurance strategies under 4/2 stochastic volatility model
• Modelling stochastic skew of FX options using SLV models with stochastic spot/vol correlation and correlated jumps
• Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model
• HIGH ORDER SPLITTING METHODS FOR FORWARD PDEs AND PIDEs
• LSV models with stochastic interest rates and correlated jumps
• Pricing Exotic Discrete Variance Swaps under the 3/2-Stochastic Volatility Models
• A superconvergent partial differential equation approach to price variance swaps under regime switching models
• Strong approximation of a two-factor stochastic volatility model under local Lipschitz condition

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