Mass at zero in the uncorrelated SABR model and implied volatility asymptotics

Archil Gulisashvili, Blanka Horvath and Antoine Jacquier

Quantitative Finance, 2018, vol. 18, issue 10, 1753-1765

Abstract: We study the mass at the origin in the uncorrelated stochastic alpha, beta, rho stochastic volatility model and derive several tractable expressions, in particular when time becomes small or large. As an application—in fact the original motivation for this paper—we derive small-strike expansions for the implied volatility when the maturity becomes short or large. These formulae, by definition arbitrage free, allow us to quantify the impact of the mass at zero on existing implied volatility approximations, and in particular how correct/erroneous these approximations become.

Date: 2018
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DOI: 10.1080/14697688.2018.1432883

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