Analytic approximation of the transition density function under a multi-scale volatility model

Year 2019, Volume: 48 Issue: 3, 682 - 688, 15.06.2019

Yong-ki Ma

Abstract

The transition density function plays an important role in understanding and explaining the dynamics of the stochastic process. We propose an approach which can be used for the analytic approximation of the transition density related to a multi-scale stochastic volatility model. Using perturbation theory, we compute the leading-order term and the first-order correction terms. A numerical test also confirms the effectiveness of the model.

Keywords

Multi-scale stochastic volatility model, transition density function, perturbation theory

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