Date: Wednesday, February 03, 2016
Location: 1360 East Hall (4:00 PM to 5:00 PM)
Title: Smalltime asymptotics for fast meanreverting stochastic volatility models
Abstract: We use stochastic volatility models, with fast meanreverting volatility, to price outofthemoney (OTM) European call options near maturity. The regime of interest is when time to maturity is small, but large compared to the meanreversion time of the stochastic volatility. The different time scales of meanreversion and time to maturity makes this a multi scale problem. To obtain asymptotics of the OTM option price and the corresponding implied volatility, we first prove a large deviation principle for stock price, as time to maturity approaches zero. The large deviation principle is obtained by PDE techniques rather than probabilistic methods. Due to the mutliscale nature of the problem, the PDE techniques involve averaging viscosity solutions of nonlinear PDEs.
This is joint work with JeanPierre Fouque, Jin Feng and Lea Popovic.
Files: 3292_TalkUM_AA.pdf
Speaker: Rohini Kumar
Institution: Wayne State University
Event Organizer: Erhan Bayraktar erhan@umich.edu
