Marginal density expansions for diffusions and stochastic volatility, part II: Applications [to the Stein--Stein model]
In the compagnion paper [Marginal density expansions for diffusions and stochastic volatility, part I] we discussed density expansions for multidimensional diffusions $(X^1,...,X^d)$, at fixed time $T$ and projected to their first $l$ coordinates, in the small noise regime. Global conditions were found which replace the well-known "not-in-cutlocus" condition known from heat-kernel asymptotics. In the present paper we discuss financial applications; these include tail and implied volatility asymptotics in some correlated stochastic volatility models. In particular, we solve a problem left open by A. Gulisashvili and E.M. Stein (2009).
References listed on IDEAS
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- Roger W. Lee, 2004. "The Moment Formula For Implied Volatility At Extreme Strikes," Mathematical Finance, Wiley Blackwell, vol. 14(3), pages 469-480.
- S. Benaim & P. Friz, 2009. "Regular Variation And Smile Asymptotics," Mathematical Finance, Wiley Blackwell, vol. 19(1), pages 1-12.
- Jim Gatheral & Antoine Jacquier, 2011.
"Convergence of Heston to SVI,"
Taylor & Francis Journals, vol. 11(8), pages 1129-1132.
- Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-752.
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