TY - JOUR
T1 - On a one time-step Monte Carlo simulation approach of the SABR model
T2 - Application to European options
AU - Leitao Rodriguez, A.
AU - Grzelak, Lech A.
AU - Oosterlee, Cornelis W.
PY - 2017
Y1 - 2017
N2 - 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 time-integrated variance (conditional on the SABR volatility), 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.
AB - 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 time-integrated variance (conditional on the SABR volatility), 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.
KW - Computational finance
KW - Copulas
KW - SABR model
KW - Stochastic-local volatility models
UR - http://www.scopus.com/inward/record.url?scp=84986538708&partnerID=8YFLogxK
U2 - 10.1016/j.amc.2016.08.030
DO - 10.1016/j.amc.2016.08.030
M3 - Article
AN - SCOPUS:84986538708
SN - 0096-3003
VL - 293
SP - 461
EP - 479
JO - Applied Mathematics and Computation
JF - Applied Mathematics and Computation
ER -