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A stochastic volatility alternative to SABR

By L.C.G. Rogers and Luitgard A. M. Veraart

Abstract

We present two new stochastic volatility models in which option prices for European plain-vanilla options have closed-form expressions. The models are motivated by the well-known SABR model, but use modified dynamics of the underlying asset. The asset process is modelled as a product of functions of two independent stochastic processes: a Cox-Ingersoll-Ross process and a geometric Brownian motion. An application of the models to options written on foreign currencies is studied

Topics: HB Economic Theory, QA Mathematics
Publisher: Applied Probability Trust
Year: 2008
DOI identifier: 10.1239/jap
OAI identifier: oai:eprints.lse.ac.uk:37620
Provided by: LSE Research Online
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