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A stochastic volatility alternative to SABR

Rogers, L.C.G. and Veraart, Luitgard A. M. (2008) A stochastic volatility alternative to SABR. Journal of Applied Probability, 45 (4). pp. 1071-1085. ISSN 0021-9002

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Abstract

We present two new stochastic volatility models in which option prices for European plain-vanilla options have closed-form expressions. The models are motivated by the well-known SABR model, but use modified dynamics of the underlying asset. The asset process is modelled as a product of functions of two independent stochastic processes: a Cox-Ingersoll-Ross process and a geometric Brownian motion. An application of the models to options written on foreign currencies is studied.

Item Type: Article
Official URL: http://www.appliedprobability.org/content.aspx?Gro...
Additional Information: © 2008 Applied Probability Trust
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Sets: Departments > Mathematics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 27 Jul 2011 13:45
URL: http://eprints.lse.ac.uk/37620/

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