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Analytical expansions for parabolic equations

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  • Matthew Lorig
  • Stefano Pagliarani
  • Andrea Pascucci

Abstract

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.

Suggested Citation

  • Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2013. "Analytical expansions for parabolic equations," Papers 1312.3314, arXiv.org, revised Nov 2014.
    • Handle: RePEc:arx:papers:1312.3314
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    File URL: http://arxiv.org/pdf/1312.3314
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    References listed on IDEAS

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    1. Fouque,Jean-Pierre & Papanicolaou,George & Sircar,Ronnie & Sølna,Knut, 2011. "Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives," Cambridge Books, Cambridge University Press, number 9780521843584.
    2. Victor Nistor & Wen Cheng & Nick Costanzino & John Liechty & Anna L. Mazzucato, 2011. "Closed-form asymptotics and numerical approximations of 1{D} parabolic equations with applications to option pricing," Post-Print hal-01284880, HAL.
    3. Antoine Jacquier & Matthew Lorig, 2012. "The Smile of certain L\'evy-type Models," Papers 1207.1630, arXiv.org, revised Apr 2013.
    4. Patrick Hagan & Diana Woodward, 1999. "Equivalent Black volatilities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 6(3), pages 147-157.
    5. Matthew Lorig, 2013. "The exact smile of certain local volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 13(6), pages 897-905, May.
    6. Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2013. "A family of density expansions for L\'evy-type processes," Papers 1312.7328, arXiv.org.
    7. E. Benhamou & E. Gobet & M. Miri, 2010. "Expansion Formulas For European Options In A Local Volatility Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 603-634.
    8. Peter K. Friz & Stefan Gerhold & Marc Yor, 2013. "How to make Dupire's local volatility work with jumps," Quantitative Finance, Taylor & Francis Journals, vol. 14(8), pages 1327-1331, December.
    9. Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2013. "A Taylor series approach to pricing and implied vol for LSV models," Papers 1308.5019, arXiv.org.
    10. Peter K. Friz & Stefan Gerhold & Marc Yor, 2013. "How to make Dupire's local volatility work with jumps," Papers 1302.5548, arXiv.org.
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    Citations

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    Cited by:

    1. Anastasia Borovykh & Cornelis W. Oosterlee & Andrea Pascucci, 2016. "Pricing Bermudan options under local L\'evy models with default," Papers 1604.08735, arXiv.org.
    2. Stefano Pagliarani & Andrea Pascucci, 2017. "The exact Taylor formula of the implied volatility," Finance and Stochastics, Springer, vol. 21(3), pages 661-718, July.
    3. Hu, Jun & Kanniainen, Juho, 2015. "Asymptotic expansion of European options with mean-reverting stochastic volatility dynamics," Finance Research Letters, Elsevier, vol. 14(C), pages 1-10.
    4. Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2014. "Asymptotics for $d$-dimensional L\'evy-type processes," Papers 1404.3153, arXiv.org, revised Nov 2014.
    5. Matthew Lorig, 2014. "Indifference prices and implied volatilities," Papers 1412.5520, arXiv.org, revised Sep 2015.
    6. Weston Barger & Matthew Lorig, 2016. "Approximate pricing of European and Barrier claims in a local-stochastic volatility setting," Papers 1610.05728, arXiv.org, revised Apr 2017.
    7. Weston Barger & Matthew Lorig, 2018. "Optimal liquidation under stochastic price impact," Papers 1804.04170, arXiv.org.
    8. Tim Leung & Matthew Lorig, 2016. "Optimal static quadratic hedging," Quantitative Finance, Taylor & Francis Journals, vol. 16(9), pages 1341-1355, September.
    9. Matthew Lorig & Ronnie Sircar, 2015. "Portfolio Optimization under Local-Stochastic Volatility: Coefficient Taylor Series Approximations & Implied Sharpe Ratio," Papers 1506.06180, arXiv.org.
    10. Weston Barger & Matthew Lorig, 2017. "Approximate pricing of European and Barrier claims in a local-stochastic volatility setting," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-31, June.
    11. Olesya Grishchenko & Xiao Han & Victor Nistor, 2018. "A volatility-of-volatility expansion of the option prices in the SABR stochastic volatility model," Papers 1812.09904, arXiv.org.
    12. Tim Leung & Matthew Lorig & Andrea Pascucci, 2014. "Leveraged {ETF} implied volatilities from {ETF} dynamics," Papers 1404.6792, arXiv.org, revised Apr 2015.

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