A stochastic volatility alternative to SABR
Rogers, L. & Veraart, L. A. M.
(2008).
A stochastic volatility alternative to SABR.
Journal of Applied Probability,
45(4), 1071-1085.
https://doi.org/10.1239/jap/1231340234
(2008).
A stochastic volatility alternative to SABR.
Journal of Applied Probability,
45(4), 1071-1085.
https://doi.org/10.1239/jap/1231340234
We present two new stochastic volatility models in which option prices for European plain-vanilla options have closed-form expressions. The models are motivated by the well-known SABR model, but use modified dynamics of the underlying asset. The asset process is modelled as a product of functions of two independent stochastic processes: a Cox-Ingersoll-Ross process and a geometric Brownian motion. An application of the models to options written on foreign currencies is studied.