On the short-time behaviour of up-and-in barrier options using Malliavin calculus

Abstract

In this paper we study the short-maturity asymptotics of up-and-in barrier options under a broad class of stochastic volatility models. Our approach uses Malliavin calculus techniques, typically used for linear stochastic partial differential equations, to analyse the law of the supremum of the log-price process. We derive a concentration inequality and explicit bounds on the density of the supremum in terms of the time to maturity. These results yield an upper bound on the asymptotic decay rate of up-and-in barrier option prices as maturity vanishes. We further demonstrate the applicability of our framework to the rough Bergomi model and validate the theoretical results with numerical experiments.

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