Semi-analytic path integral solution of SABR and Heston equations: pricing Vanilla and Asian options (1605.00307v1)

Abstract: We discuss a semi-analytical method for solving SABR-type equations based on path integrals. In this approach, one set of variables is integrated analytically while the second set is integrated numerically via Monte-Carlo. This method, known in the literature as Conditional Monte-Carlo, leads to compact expressions functional on three correlated stochastic variables. The methodology is practical and efficient when solving Vanilla pricing in the SABR, Heston and Bates models with time depending parameters. Further, it can also be practically applied to pricing Asian options in the $\beta=0$ SABR model and to other $\beta=0$ type models.