Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
Abstract
We study the mass at the origin in the uncorrelated SABR stochastic volatility model, and derive several tractable expressions, in particular when time becomes small or large. As an application--in fact the original motivation for this paper--we derive small-strike expansions for the implied volatility when the maturity becomes short or large. These formulae, by definition arbitrage free, allow us to quantify the impact of the mass at zero on existing implied volatility approximations, and in particular how correct/erroneous these approximations become.
Keywords
Cite
@article{arxiv.1502.03254,
title = {Mass at zero in the uncorrelated SABR model and implied volatility asymptotics},
author = {Archil Gulisashvili and Blanka Horvath and Antoine Jacquier},
journal= {arXiv preprint arXiv:1502.03254},
year = {2016}
}
Comments
15 pages, 2 tables, 8 figures This updated version concentrates on the small- and large-time asymptotic behaviour of the mass at zero in the uncorrelated SABR model. Some geometric considerations regarding the correlated case are provided in a companion paper arXiv:1610.05636