Explicit approximations of option prices via Malliavin calculus in a general stochastic volatility framework

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Authors: Kaustav Das, Nicolas Langrené
Cited by: 0
References: 34

Abstract

We establish an explicit approximation formula for European put option prices within a general stochastic volatility model with time-dependent parameters. Our methodology is based on expansions of the mixing representation of the put option price as an expectation of the Black-Scholes formula, in which the resulting terms are calculated explicitly by Malliavin calculus. We obtain an explicit representation of the error generated by the expansion procedure, and bound it in terms of moments of functionals of the underlying volatility process. Under the assumption of piecewise-constant parameters, our approximation formulas become closed-form, and compatible with a proposed fast calibration scheme. Finally, we perform a numerical sensitivity analysis to investigate the quality of our approximation formula in the so-called Stochastic Verhulst model, and show that the errors are well within the acceptable range for application purposes.

Fields of Study & Subjects

Stochastic processes and financial applications Financial Markets and Investment Strategies Monetary Policy and Economic Impact

Publication details

Journal / source
Journal of Computational and Applied Mathematics
Publisher
Elsevier BV
Volume
488
Pages
117795–117795
Publication date
22 May 2026
Language
EN