Marginal density expansions for diffusions and stochastic volatility, part I: Theoretical Foundations
AbstractDensity expansions for hypoelliptic diffusions $(X^1,...,X^d)$ are revisited. In particular, we are interested in density expansions of the projection $(X_T^1,...,X_T^l)$, at time $T>0$, with $l \leq d$. Global conditions are found which replace the well-known "not-in-cutlocus" condition known from heat-kernel asymptotics. Our small noise expansion allows for a "second order" exponential factor. As application, new light is shed on the Takanobu--Watanabe expansion of Brownian motion and Levy's stochastic area. Further applications include tail and implied volatility asymptotics in some stochastic volatility models, discussed in a compagnion paper.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1111.2462.
Date of creation: Nov 2011
Date of revision: May 2013
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- Jim Gatheral & Antoine Jacquier, 2011.
"Convergence of Heston to SVI,"
Taylor and Francis Journals, vol. 11(8), pages 1129-1132.
- S. Benaim & P. Friz, 2009. "Regular Variation And Smile Asymptotics," Mathematical Finance, Wiley Blackwell, vol. 19(1), pages 1-12.
- Antoine Jacquier & Patrick Roome, 2013. "The Small-Maturity Heston Forward Smile," Papers 1303.4268, arXiv.org, revised Aug 2013.
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