Explicit implied volatilities for multifactor local-stochastic volatility models

Matthew Lorig, Stefano Pagliarani and Andrea Pascucci

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Abstract: We consider an asset whose risk-neutral dynamics are described by a general class of local-stochastic volatility models and derive a family of asymptotic expansions for European-style option prices and implied volatilities. Our implied volatility expansions are explicit; they do not require any special functions nor do they require numerical integration. To illustrate the accuracy and versatility of our method, we implement it under five different model dynamics: CEV local volatility, quadratic local volatility, Heston stochastic volatility, $3/2$ stochastic volatility, and SABR local-stochastic volatility.

Date: 2013-06, Revised 2014-11
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Citations: View citations in EconPapers (15)

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Journal Article: EXPLICIT IMPLIED VOLATILITIES FOR MULTIFACTOR LOCAL-STOCHASTIC VOLATILITY MODELS (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1306.5447

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