Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
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Abstract: We consider an SPDE description of a large portfolio limit model where the underlying asset prices evolve according to certain stochastic volatility models with default upon hitting a lower barrier. The asset prices and their volatilities are correlated via systemic Brownian motions, and the resulting SPDE is defined on the positive half-space with Dirichlet boundary conditions. We study the convergence of the loss from the system, a function of the total mass of a solution to this stochastic initial-boundary value problem under fast mean reversion of the volatility. We consider two cases. In the first case the volatility converges to a limiting distribution and the convergence of the system is in the sense of weak convergence. On the other hand, when only the mean reversion of the volatility goes to infinity we see a stronger form of convergence of the system to its limit. Our results show that in a fast mean-reverting volatility environment we can accurately estimate the distribution of the loss from a large portfolio by using an approximate constant volatility model which is easier to handle.
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Cited in
(7)- Large portfolio losses in a turbulent market
- Stochastic evolution equations for large portfolios of stochastic volatility models
- Well-posedness of a system of SDEs driven by jump random measures
- Simulation of Conditional Expectations Under Fast Mean-Reverting Stochastic Volatility Models
- Stochastic PDEs for large portfolios with general mean-reverting volatility processes
- A unified model of SABR and mean-reverting stochastic volatility for derivative pricing
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