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The Heston Riemannian distance function

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  • Archil Gulisashvili
  • Peter Laurence

Abstract

The Heston model is a popular stock price model with stochastic volatility that has found numerous applications in practice. In the present paper, we study the Riemannian distance function associated with the Heston model and obtain explicit formulas for this function using geometrical and analytical methods. Geometrical approach is based on the study of the Heston geodesics, while the analytical approach exploits the links between the Heston distance function and the sub-Riemannian distance function in the Grushin plane. For the Grushin plane, we establish an explicit formula for the Legendre-Fenchel transform of the limiting cumulant generating function and prove a partial large deviation principle that is true only inside a special set.

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  • Archil Gulisashvili & Peter Laurence, 2013. "The Heston Riemannian distance function," Papers 1302.2337, arXiv.org.
  • Handle: RePEc:arx:papers:1302.2337
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    File URL: http://arxiv.org/pdf/1302.2337
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    1. Martin Forde & Antoine Jacquier & Aleksandar Mijatovic, 2009. "Asymptotic formulae for implied volatility in the Heston model," Papers 0911.2992, arXiv.org, revised May 2010.
    2. Martin Forde & Antoine Jacquier, 2011. "Small-Time Asymptotics for an Uncorrelated Local-Stochastic Volatility Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(6), pages 517-535, April.
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