On the Implied Volatility of Asian Options Under Stochastic Volatility Models

Abstract

In this paper, we study the short-time behaviour of the at-the-money implied volatility for arithmetic Asian options with fixed strike price. The asset price is assumed to follow the Black–Scholes model with a general stochastic volatility process. Using techniques of the Malliavin calculus developed in Alòs, García-Lorite, and Muguruza [2022. On Smile Properties of Volatility Derivatives: Understanding the VIX Skew. SIAM Journal on Financial Mathematics. 13(1): 32–69. https://doi.org/10.1137/19M1269981], we give sufficient conditions on the stochastic volatility in order to compute the level of the implied volatility of the option when the maturity converges to zero. Then, we find a short maturity asymptotic formula for the skew slope of the implied volatility that depends on the correlation between prices and volatilities and the Hurst parameter of the volatility model. We apply our general results to the SABR and fractional Bergomi models, and provide numerical simulations that confirm the accurateness of the asymptotic formulas.