Moment Explosions in Stochastic Volatility Models

32 Pages Posted: 29 Jun 2004

See all articles by Leif B. G. Andersen

Leif B. G. Andersen

Bank of America

Vladimir Piterbarg

NatWest Markets; affiliation not provided to SSRN

Date Written: July 10, 2005


In this paper, we demonstrate that many stochastic volatility models have the undesirable property that moments of order higher than one can become infinite in finite time. As arbitrage-free price computation for a number of important fixed income products involves forming expectations of functions with super-linear growth, such lack of moment stability is of significant practical importance. For instance, we demonstrate that reasonably parameterized models can produce infinite prices for Eurodollar futures and for swaps with floating legs paying either Libor-in-arrears or a constant maturity swap (CMS) rate. We systematically examine the moment explosion property across a spectrum of stochastic volatility models. Related properties such as the failure of the martingale property, and asymptotics of the volatility smile are also considered.

Keywords: Stochastic volatility models, CEV model, displaced diffusion, moment stability, martingale property, integrability, volatility smile asymptotics

JEL Classification: C60, G12, G13

Suggested Citation

Andersen, Leif B.G. and Piterbarg, Vladimir, Moment Explosions in Stochastic Volatility Models (July 10, 2005). Available at SSRN: or

Leif B.G. Andersen (Contact Author)

Bank of America ( email )

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New York, NY 10036
United States
646-855-1835 (Phone)

Vladimir Piterbarg

NatWest Markets ( email )

250 Bishopsgate
London, EC2M 4AA
United Kingdom

affiliation not provided to SSRN

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