Uncertain volatility models with stochastic bounds
From MaRDI portal
Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Software, source code, etc. for problems pertaining to game theory, economics, and finance (91-04) Financial applications of other theories (91G80)
Abstract: In this paper, we propose the uncertain volatility models with stochastic bounds. Like the regular uncertain volatility models, we know only that the true model lies in a family of progressively measurable and bounded processes, but instead of using two deterministic bounds, the uncertain volatility fluctuates between two stochastic bounds generated by its inherent stochastic volatility process. This brings better accuracy and is consistent with the observed volatility path such as for the VIX as a proxy for instance. We apply the regular perturbation analysis upon the worst case scenario price, and derive the first order approximation in the regime of slowly varying stochastic bounds. The original problem which involves solving a fully nonlinear PDE in dimension two for the worst case scenario price, is reduced to solving a nonlinear PDE in dimension one and a linear PDE with source, which gives a tremendous computational advantage. Numerical experiments show that this approximation procedure performs very well, even in the regime of moderately slow varying stochastic bounds.
Recommendations
- Approximation for option prices under uncertain volatility
- -hypergeometric uncertain volatility models and their connection to 2BSDEs
- Calibrating volatility function bounds for an uncertain volatility model
- Bounds on European option prices under stochastic volatility
- Uncertain Parameters, an Empirical Stochastic Volatility Model and Confidence Limits
Cites work
- scientific article; zbMATH DE number 4004696 (Why is no real title available?)
- scientific article; zbMATH DE number 51724 (Why is no real title available?)
- scientific article; zbMATH DE number 3505981 (Why is no real title available?)
- A closed-form solution for options with stochastic volatility with applications to bond and currency options
- A risk-neutral equilibrium leading to uncertain volatility pricing
- ADI finite difference schemes for option pricing in the Heston model with correlation
- Approximation for option prices under uncertain volatility
- Constructing sublinear expectations on path space
- Continuous-time stochastic control and optimization with financial applications
- Controlled Markov processes and viscosity solutions
- Dual formulation of second order target problems
- Jump-diffusion processes: volatility smile fitting and numerical methods for option pricing
- Laplace Transforms for Integrals of Markov Processes
- Multidimensional diffusion processes.
- Multiscale stochastic volatility for equity, interest rate, and credit derivatives.
- Nonlinear Lévy processes and their characteristics
- Nonlinear option pricing
- Nonlinear partial differential equations. Asymptotic behavior of solutions and self-similar solutions
- Option pricing when underlying stock returns are discontinuous
- Pricing and hedging derivative securities in markets with uncertain volatilities
- Random \(G\)-expectations
- Robust superhedging with jumps and diffusion
- Robust utility maximization with Lévy processes
- Singular Perturbations in Option Pricing
- Superreplication under volatility uncertainty for measurable claims
- The pricing of options and corporate liabilities
- Uncertain volatility and the risk-free synthesis of derivatives
Cited in
(13)- -hypergeometric uncertain volatility models and their connection to 2BSDEs
- A simple framework for the stochastic volatility uncertainty
- Approximation for option prices under uncertain volatility
- Ambiguous volatility, possibility and utility in continuous time
- Markov chain approximation and measure change for time-inhomogeneous stochastic processes
- Models with Uncertain Volatility
- Calibrating volatility function bounds for an uncertain volatility model
- Well-posedness and stability analysis of two classes of generalized stochastic volatility models
- Correlations and bounds for stochastic volatility models
- A general framework to simulate diffusions with discontinuous coefficients and local times
- Measures of model uncertainty and calibrated option bounds
- Optimal investment with correlated stochastic volatility factors
- Uncertain volatility and the risk-free synthesis of derivatives
This page was built for publication: Uncertain volatility models with stochastic bounds
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q3122062)
