Asymptotic analysis for stochastic volatility: Edgeworth expansion

Details Asymptotic analysis for stochastic volatility: Edgeworth expansion Asymptotic analysis for stochastic volatility: Edgeworth expansion

2010-04-13

arxiv.org/abs/1004.2106v1

Economy

Quantitative Finance

Computational Finance

Scientific paper

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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