On a one time-step Monte Carlo simulation approach of the SABR model: Application to European options

Álvaro Leitao, Lech Grzelak and Cornelis Oosterlee

Applied Mathematics and Computation, 2017, vol. 293, issue C, 461-479

Abstract: In this work, we propose a one time-step Monte Carlo method for the SABR model. We base our approach on an accurate approximation of the cumulative distribution function of the time-integrated variance (conditional on the SABR volatility), using Fourier techniques and a copula. Resulting is a fast simulation algorithm which can be employed to price European options under the SABR dynamics. Our approach can thus be seen as an alternative to Hagan’s analytic formula for short maturities that may be employed for model calibration purposes.

Keywords: Computational finance; Stochastic-local volatility models; SABR model; Copulas (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0096300316305252
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:293:y:2017:i:c:p:461-479

DOI: 10.1016/j.amc.2016.08.030

Access Statistics for this article

Applied Mathematics and Computation is currently edited by Theodore Simos

More articles in Applied Mathematics and Computation from Elsevier
Bibliographic data for series maintained by Catherine Liu ().