IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v19y2019i8p1339-1356.html
   My bibliography  Save this article

Target volatility option pricing in the lognormal fractional SABR model

Author

Listed:
  • Elisa Alòs
  • Rupak Chatterjee
  • Sebastian F. Tudor
  • Tai-Ho Wang

Abstract

We examine in this article the pricing of target volatility options in the lognormal fractional SABR model. A decomposition formula of Itô's calculus yields an approximation formula for the price of a target volatility option in small time by the technique of freezing the coefficient. A decomposition formula in terms of Malliavin derivatives is also provided. Alternatively, we also derive closed form expressions for a small volatility of volatility expansion of the price of a target volatility option. Numerical experiments show the accuracy of the approximations over a reasonably wide range of parameters.

Suggested Citation

  • Elisa Alòs & Rupak Chatterjee & Sebastian F. Tudor & Tai-Ho Wang, 2019. "Target volatility option pricing in the lognormal fractional SABR model," Quantitative Finance, Taylor & Francis Journals, vol. 19(8), pages 1339-1356, August.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:8:p:1339-1356
    DOI: 10.1080/14697688.2019.1574021
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/14697688.2019.1574021
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/14697688.2019.1574021?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Xingchun, 2021. "Pricing volatility-equity options under the modified constant elasticity of variance model," Finance Research Letters, Elsevier, vol. 38(C).
    2. Raul Merino & Jan Posp'iv{s}il & Tom'av{s} Sobotka & Tommi Sottinen & Josep Vives, 2019. "Decomposition formula for rough Volterra stochastic volatility models," Papers 1906.07101, arXiv.org, revised Aug 2019.
    3. Hongkai Cao & Alexandru Badescu & Zhenyu Cui & Sarath Kumar Jayaraman, 2020. "Valuation of VIX and target volatility options with affine GARCH models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(12), pages 1880-1917, December.
    4. Tudor, Sebastian F. & Chatterjee, Rupak & Nguyen, Lac & Huang, Yuping, 2019. "Quantum systems for Monte Carlo methods and applications to fractional stochastic processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 534(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:19:y:2019:i:8:p:1339-1356. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.