In this article, we develop a systematic approach to the reduction of dimensionality of smile-enabled models by projecting them onto a displaced version of the two-dimensional Heston process. The projection is the key for deriving efficient, analytical approximations to European option prices in such models. This is a further development of the method of Markovian projection previously used for projecting on the displaced-diffusion process (with skew but without smile). The method is derived in a generic form and has a wide range of suitable applications. Examples for spread and basket options are given.
Authors: A. Antonov, T. Misirpashaev, and V. Piterbarg
Complete the form below to download this complimentary research paper.
Numerix Journal Vol. 8, No. 1
Asia Risk Congress Virtual
Numerix: Pushing Boundaries to Create Breakthrough Technology
CrossAsset Structured Finance
Asia Risk Congress
CrossAsset - Leading the Industry in Advanced Models and Methods
Numerix Quant Tech Resource Hub
SRP Europe Conference 2021: Optimizing Financial Valuations to Improve Investor Experience
QuantMinds 2020: Modelling Energy Curves for XVA
QuantMinds in Focus
Quantitative R&D Innovations Update
Neural Networks with Asymptotics Control