New solvable stochastic volatility models for pricing volatility derivatives
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Publication:744402
Abstract: Classical solvable stochastic volatility models (SVM) use a CEV process for instantaneous variance where the CEV parameter 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).
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Cited in
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- LSV models with stochastic interest rates and correlated jumps
- Solvable local and stochastic volatility models: supersymmetric methods in option pricing
- HIGH ORDER SPLITTING METHODS FOR FORWARD PDEs AND PIDEs
- Modelling stochastic skew of FX options using SLV models with stochastic spot/vol correlation and correlated jumps
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- Stochastic elasticity of vol-of-vol and pricing of variance swaps
- Pricing exotic discrete variance swaps under the 3/2-stochastic volatility models
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