Work

Option Pricing in Sandwiched Volterra Volatility Model

Year: 2024

Type: article

Abstract: . We introduce a new model of financial market with stochastic volatility driven by an arbitrary Hölder continuous Gaussian Volterra process. The distinguishing feature of the model is the form of the volatility equation, which ensures that the solution is “sandwiched” between two arbitrary Hölder continuous functions chosen in advance. We discuss the structure of local martingale measures on this market, investigate integrability and Malliavin differentiability of prices and volatilities, and study absolute continuity of the corresponding probability laws. Additionally, we utilize Malliavin calculus to develop an algorithm of pricing options with discontinuous payoffs.

Source: SIAM Journal on Financial Mathematics

DOI: 10.1137/22m1521328

Authors: Giulia Di Nunno, Yuliya Mishura, Anton Yurchenko-Tytarenko

Institutions: University of Oslo, Norwegian School of Economics, Taras Shevchenko National University of Kyiv, Mälardalen University, Statkraft (Norway)

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: Stiftelsen för Strategisk Forskning, Norges Forskningsråd, Japan Science and Technology Agency, Core Research for Evolutional Science and Technology