On a One Time-Step SABR Simulation Approach: Application to European Options
Applied Mathematics and Computation 293: 461-479, 2017
25 Pages Posted: 16 Apr 2016 Last revised: 27 Oct 2018
Date Written: February 10, 2016
Abstract
In this work, we propose a one time-step Monte Carlo method for the SABR model. We base our approach on an accurate approximation of the cumulative distribution function of the integrated variance (conditional on the SABR volatility process), using Fourier techniques and a copula. Resulting is a fast simulation algorithm which can be employed to price European options under the SABR dynamics. Our approach can thus be seen as an alternative to Hagan's analytic formula for short maturities that may be employed for model calibration purposes.
Keywords: Computational finance, Stochastic-local volatility models, SABR model, Copulas
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