Very short term SABR issues

Jurassic · Post by **Jurassic** » Sat Aug 31, 2019 8:23 am

What is the problem with the SABR model for very short expiries (up to 1 week)? I swear there is a paper written by a guy from Imperial about this (I cant find it).

bullero · Post by **bullero** » Sat Aug 31, 2019 5:12 pm

The standard SABR has pure diffusion dynamics for vol. Based on that my guess would be that it is not enough to fit short maturities. Plain vanilla Heston has similar problems. The poor fit to short maturities is one motivation behind jump-diffusion class of SV models.