English

Heat kernel methods in finance: the SABR model

Pricing of Securities 2012-01-19 v2

Abstract

The SABR model is a stochastic volatility model not admitting a closed form solution. Hagan, Kumar, Leniewski and Woodward have obtained an approximate solution by means of perturbative techniques. A more precise approximation was found by Henry-Labord\`ere with the heat kernel expansion method. The latter relies on deep and hard theorems from Riemannian geometry which are almost totally unknown to the professionals of finance, who however are those primarily interested in these results. The goal of this report is to fill this gap and to make these topics understandable with a basic knowledge of calculus and linear algebra.

Cite

@article{arxiv.1201.1437,
  title  = {Heat kernel methods in finance: the SABR model},
  author = {Carmelo Vaccaro},
  journal= {arXiv preprint arXiv:1201.1437},
  year   = {2012}
}

Comments

59 pages, no figures

R2 v1 2026-06-21T20:01:20.302Z