Andrey Itkin releases paper on option pricing with non-affine stochastic volatility extending the DSINC method
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Andrey Itkin published an academic paper extending the DSINC method for American option pricing, originally applicable only to affine Heston-type models, to general one-factor non-affine stochastic volatility models including 3/2, SABR, GARCH, and lognormal volatility, verifying the validity of the collapse identity in non-affine scenarios. Tests show that the pricing results of this method on the four model classes above deviate from fine finite difference benchmarks by within 1 basis point of the strike price; computational cost is comparable to or lower than the paper's own finite difference implementation, with only the Hankel implementation for the uncorrelated SABR model being relatively slow.
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- arXiv q-finDSINC Method Overcomes Heston Model Limitations: Applications to 3/2 and Other Non-Affine Stochastic Volatility Models
This study extends the DSINC method, originally used for American option pricing, from affine Heston-type models to general single-factor stochastic volatility models, verifying the effectiveness of the collapse identity under non-affine models. The 3/2 model can derive closed-form joint transforms based on Kummer functions, the correlation-free SABR model can adopt Bessel representations, and when closed-form transforms are unavailable, the volatility integral can be calculated by solving the backward equation frequency by frequency.
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