$\alpha$-Hypergeometric Uncertain Volatility Models and their Connection to 2BSDEs

Zaineb Mezdoud, Carsten Hartmann, Mohamed Riad Remita and Omar Kebiri

Papers from arXiv.org

Abstract: In this article we propose a $\alpha$-hypergeometric model with uncertain volatility (UV) where we derive a worst-case scenario for option pricing. The approach is based on the connexion between a certain class of nonlinear partial differential equations of HJB-type (G-HJB equations), that govern the nonlinear expectation of the UV model and that provide an alternative to the difficult model calibration problem of UV models, and second-order backward stochastic differential equations (2BSDEs). Using asymptotic analysis for the G-HJB equation and the equivalent 2BSDE representation, we derive a limit model that provides an accurate description of the worst-case price scenario in cases when the bounds of the UV model are slowly varying. The analytical results are tested by numerical simulations using a deep learning based approximation of the underlying 2BSDE.

Date: 2021-08
New Economics Papers: this item is included in nep-isf
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