Uncertain volatility models -- theory and application

DOI10.1007/978-3-642-56323-2MaRDI QIDQ1601918zbMATH OpenOpenAlexFDO

Authors Robert Buff

Publication date 27 June 2002

Published in Springer Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/978-3-642-56323-2

zbMATH Keywords

American optionsC++ implementationnonlinearityoption pricingstochastic volatilityuncertain volatility modelsvolatility bands

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Introductory exposition (textbooks, tutorial papers, etc.) pertaining to game theory, economics, and finance (91-01) Computational methods for problems pertaining to game theory, economics, and finance (91-08) Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20)

Review text

The book is devoted to the study of uncertain volatility models that evaluate option portfolios under worst- and best-case scenarios when the volatility coefficient of the pricing model can not be determined exactly, and the user defines only subjective volatility constraints: within those constraints, extremal prices are computed. Two types of constraints are studied in this book: (1) volatility bands with upper and lower bounds; (2) shock scenarios with short periods of extreme volatility, but unknown timing. The author's approach is based on the uncertain volatility model developed by \textit{M. Avellaneda} and \textit{A. Parás} [Appl. Math. Finance 3, 21-52 (1996; Zbl 1097.91514)]. Uncertain volatility models are nonlinear, and this book explores algorithmic issues that arise due to linearity. The author travels in this book the entire road from innovative mathematical finance to a working software system, which he calls Mtg (for ``Martingale). The theory, numerical methods, combinatorial algorithms, software architecture and user interface are discussed. The software, contained on the accompanying CD for most Windows platforms, can be used through a command-line interface, as C++ library, through Mathematica, and over the Web. The software on the accompanying CD consists of 81500 lines of C++ code and 11500 lines of Java code. The book contains 13 Chapters and three sections with The Network Application MtgClt/MtgSvr, The Scripting Language MtgScript and Mathematica Extensions. Practicioners and students who need to build analytic software libraries may benefit from reading this book and studying the software. This book is also for graduate students and researchers who wish to study advanced aspects of volatility risk in portfolios of vanilla and exotic options.

Recommendations

• Combinatorial implications of nonlinear uncertain volatility models: the case of barrier options
• American options under uncertain volatility
• Approximation for option prices under uncertain volatility
• Finite volume method of option pricing model under uncertain volatility
• Option valuation under stochastic volatility II. With Mathematica code

Cited in

(17)

• A volatility smile-based uncertainty index
• The asymptotic behavior of the solutions of the Black-Scholes equation as volatility \(\sigma\rightarrow 0^+\)
• Game-theoretic derivation of upper hedging prices of multivariate contingent claims and submodularity
• Combining statistical intervals and market prices: the worst case state price distribution
• The pricing of options for securities markets with delayed response
• Ambiguous volatility, possibility and utility in continuous time
• Fuzzy coefficient volatility (FCV) models with applications
• On the American option-pricing model with an uncertain volatility
• Portfolio optimization with ambiguous correlation and stochastic volatilities
• Robust utility maximization for a diffusion market model with misspecified coefficients
• Uncertain volatility and the risk-free synthesis of derivatives
• Handbook of Volatility Models and Their Applications
• THE BLACK SCHOLES BARENBLATT EQUATION FOR OPTIONS WITH UNCERTAIN VOLATILITY AND ITS APPLICATION TO STATIC HEDGING
• Social Optima in Mean Field Linear-Quadratic-Gaussian Control with Volatility Uncertainty
• Models with Uncertain Volatility
• Pricing formula for a barrier call option based on stochastic delay differential equation
• Volatility, risk modeling and utility

Describes a project that uses

Uses Software

• L-BFGS-B
• Mathematica
• L-BFGS
• MtgClt

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