Some Explicitly Solvable SABR and Multiscale SABR Models: Option Pricing and Calibration

Lorella Fatone, Francesca Mariani, Maria Cristina Recchioni, Francesco Zirilli

Department of Economics, University of Verona, Verona, Italy.
Department of Management, University Politecnica Marche, Ancona, Italy.
Department of Mathematics and Information Technology, University of Camerino, Camerino, Italy.
Department of Mathematics, “G. Castelnuovo”, University of Rome “La Sapienza”, Rome, Italy.

DOI: 10.4236/jmf.2013.31002                

Abstract

A multiscale SABR model that describes the dynamics of forward prices/rates is presented. New closed form formulae for the transition probability density functions of the normal and lognormal SABR and multiscale SABR models and for the prices of the corresponding European call and put options are deduced. The technique used to obtain these formulae is rather general and can be used to study other stochastic volatility models. A calibration problem for these models is formulated and solved. Numerical experiments with real data are presented.

Keywords

Multiscale Stochastic Volatility Models; Option Pricing; Calibration Problem; FX Data

Conflicts of Interest

The authors declare no conflicts of interest.

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