The exact Taylor formula of the implied volatility

In a model driven by a multi-dimensional local diffusion, we study the behavior of implied volatility {\sigma} and its derivatives with respect to log-strike k and maturity T near expiry and at the money. We recover explicit limits of these derivatives for (T,k) approaching the origin within the parabolic region |x-k|^2 < {\lambda} T, with x denoting the spot log-price of the underlying asset and where {\lambda} is a positive and arbitrarily large constant. Such limits yield the exact Taylor formula for implied volatility within the parabola |x-k|^2 < {\lambda} T. In order to include important models of interest in mathematical finance, e.g. Heston, CEV, SABR, the analysis is carried out under the assumption that the infinitesimal generator of the diffusion is only locally elliptic

Obstacle problem for Arithmetic Asian options

We prove existence, regularity and a Feynman-Ka\v{c} representation formula of the strong solution to the free boundary problem arising in the financial problem of the pricing of the American Asian option with arithmetic average

Nash estimates and upper bounds for non-homogeneous Kolmogorov equations

We prove a Gaussian upper bound for the fundamental solutions of a class of ultra-parabolic equations in divergence form. The bound is independent on the smoothness of the coefficients and generalizes some classical results by Nash, Aronson and Davies. The class considered has relevant applications in the theory of stochastic processes, in physics and in mathematical finance.Comment: 21 page

Analytical approximation of the transition density in a local volatility model

We present a simplified approach to the analytical approximation of the transition density related to a general local volatility model. The methodology is sufficiently flexible to be extended to time-dependent coefficients, multi-dimensional stochastic volatility models, degenerate parabolic PDEs related to Asian options and also to include jumps.option pricing, analytical approximation, local volatility

Calibration of the Hobson&Rogers model: empirical tests

The path-dependent volatility model by Hobson and Rogers is considered. It is known that this model can potentially reproduce the observed smile and skew patterns of different directions, while preserving the completeness of the market. In order to quantitatively investigate the pricing performance of the model a calibration procedure is here derived. Numerical results based on S&P500 option prices give evidence of the effectiveness of the model.

On the viscosity solutions of a stochastic differential utility problem

We prove existence, uniqueness and gradient estimates of stochastic differential utility as a solution of the Cauchy problem for degenerate nonlinear partial differential equation. We also characterize the solution in the vanishing viscosity sense.Viscosity solution, Burgers' equation, Stochastic differential utility

Asymptotics for dd-dimensional L\'evy-type processes

We consider a general d-dimensional Levy-type process with killing. Combining the classical Dyson series approach with a novel polynomial expansion of the generator A(t) of the Levy-type process, we derive a family of asymptotic approximations for transition densities and European-style options prices. Examples of stochastic volatility models with jumps are provided in order to illustrate the numerical accuracy of our approach. The methods described in this paper extend the results from Corielli et al. (2010), Pagliarani and Pascucci (2013) and Lorig et al. (2013a) for Markov diffusions to Markov processes with jumps.Comment: 20 Pages, 3 figures, 3 table

Analytical expansions for parabolic equations

We consider the Cauchy problem associated with a general parabolic partial differential equation in $d$ dimensions. We find a family of closed-form asymptotic approximations for the unique classical solution of this equation as well as rigorous short-time error estimates. Using a boot-strapping technique, we also provide convergence results for arbitrarily large time intervals.Comment: 23 page