Asymptotic analysis for stochastic volatility: Edgeworth expansion

2010/04/13 by Masaaki Fukasawa, Fukasawa, Masaaki
Economics, Econometrics and Finance · Mathematics · #34E15 #60F05 #Computational Finance (q-fin.CP) #FOS: Economics and business #FOS: Mathematics #Probability (math.PR) #math.PR #msc:34E15 #msc:60F05 #q-fin.CP

paper · pdf · doi:10.48550/arxiv.1004.2106

arxiv created 2010/04/13 · arxiv updated 2010/04/14

Abstract

The validity of an approximation formula for European option prices under a general stochastic volatility model is proved in the light of the Edgeworth expansion for ergodic diffusions. The asymptotic expansion is around the Black-Scholes price and is uniform in bounded payoff func- tions. The result provides a validation of an existing singular perturbation expansion formula for the fast mean reverting stochastic volatility model.

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