Decomposition of the Pricing Formula for Stochastic Volatility Models Based on Malliavin-Skorohod Type Calculus
The goal of this survey article is to present in detail a method that, for a financial derivative under a certain stochastic volatility model, allows to obtain a decomposition of its pricing formula that distinguishes clearly the impact of correlation and jumps. This decomposed pricing formula, usually called Hull and White type formula, can be potentially useful for model selection and calibration. The method is based on the obtention of an ad-hoc anticipating Itô formula.
KeywordsHull and White type formula Malliavin-Skorohod calculus Stochastic volatility jump-diffusion models Derivative pricing Quantitative finance
Mathematical Subject Classification60H07 60H30 91G80 91G20
This paper was partially written during a four month stage in Center for Advanced Study (CAS) at the Norwegian Academy of Science and Letters. I thank CAS for the support and the kind hospitality.
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