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Aug 18

SABR stochastic volatility model

Posted by abiao at 07:37 | Code » VBA/Excel | Comments(0) | Reads(23120)
A suitable characteristic of any local and stochastic volatility model is that the model can yield the same prices of the vanilla options that were applied as inputs to the calibration of the model. failure to do so will clearly cause the model not arbitrage free and generate it nearly useless.

A substantial point of the SABR model is that the prices of vanilla options can be computed  in almost closed form  (Subject to the precise of a series expansion). Basically it has been shown that the price of a vanilla option under the SABR model is yielded by the suitable Black model, given that the correct implied volatility is employed.

SABR code in VBA and C is available together with a PDF:

wiki(SABR Volatility Model)

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