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Applied Math Talk: A Full Asymptotic Series of European Call Option Prices in the SABR Model with Beta = 1 given by Zhengji Guo (CGU)

October 14 @ 4:15 pm - 5:15 pm

We develop two new pricing formulae for European options. The purpose of these formulae is to better understand the impact of each term of the model, as well as improve the speed of the calculations. We consider the SABR model (with $\beta=1$) of stochastic volatility, which we analyze by tools from Malliavin Calculus. We follow the approach of Alòs et al (2006) who showed that under stochastic volatility framework, the option prices can be written as the sum of the classic Hull-White (1987) term and a correction due to correlation. We derive the Hull-White term, by using the conditional density of the average volatility, and write it as a two-dimensional integral. For the correction part, we use two different approaches. Both approaches rely on the pairing of the exponential formula developed by Jin, Peng, and Schellhorn (2016) with analytical calculations. The first approach, which we call ”Dyson series on the return’s idiosyncratic noise” yields a complete series expansion but necessitates the calculation of a 7-dimensional integral. Two of these dimensions come from the use of Yor’s (1992) formula for the joint density of a Brownian motion and the time-integral of geometric Brownian motion. The second approach, which we call ”Dyson series on the common noise” necessitates the calculation of only a one-dimensional integral, but the formula is more complex. This research consisted of both analytical derivations and numerical calculations. The latter show that our formulae are in general more exact, yet more time-consuming to calculate, than the first order expansion of Hagan et al (2002).

Details

Date:
October 14
Time:
4:15 pm - 5:15 pm
Event Category:

Venue

Emmy Noether Room, Millikan 1021, Pomona College
610 N. College Ave.
Claremont, California 91711
+ Google Map

Other

Speaker Name
Zhengji Guo (CGU)

Details

Date:
October 14
Time:
4:15 pm - 5:15 pm
Event Category:

Venue

Emmy Noether Room, Millikan 1021, Pomona College
610 N. College Ave.
Claremont, California 91711
+ Google Map

Other

Speaker Name
Zhengji Guo (CGU)