A stochastic volatility alternative to SABR

Rogers, L.C.G. and Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 (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
Divisions:	Mathematics
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
JEL classification:	C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
Date Deposited:	27 Jul 2011 13:45
Last Modified:	11 Dec 2024 23:24
URI:	http://eprints.lse.ac.uk/id/eprint/37620

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