On Error Estimates for Asymptotic Expansions with Malliavin Weights ï¼ Application to Stochastic Volatility Model ï¼
Abstractã€€ã€€ This paper proposes a unified method for precise estimates of the error bounds in asymptotic expansions of an option price and its Greeks (sensitivities) under a stochastic volatility model. More generally, we also derive an error estimate for an asymptotic expansion around a general partially elliptic diffusion and a more general Wiener functional, which is applicable to various important valuation and risk management tasks in the financial business such as the ones for multi-dimensional diffusion and non-diffusion models. In particular, we take the Malliavin calculus approach, and estimate the error bounds for the Malliavin weights of both the coefficient and the residual terms in the expansions by effectively applying the properties of Kusuoka-Stroock functions. Moreover, a numerical experiment under the Heston-type model confirms the effectiveness of our method.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-897.
Length: 21 pages
Date of creation: Jul 2013
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-28 (All new papers)
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