Solvable Local and Stochastic Volatility Models: Supersymmetric Methods in Option Pricing

In this paper we provide an extensive classification of one and two dimensional diffusion processes which admit an exact solution to the Kolmogorov (and hence Black-Scholes) equation (in terms of hypergeometric functions). By identifying the one-dimensional solvable processes with the class of integrable superpotentials introduced recently in supersymmetric quantum mechanics, we obtain new analytical solutions. In particular, by applying supersymmetric transformations on a known solvable diffusion process (such as the Natanzon process for which the solution is given by a hypergeometric function), we obtain a hierarchy of new solutions. These solutions are given by a sum of hypergeometric functions, generalizing the results obtained in the paper ”Black-Scholes Goes Hypergeometric” [2]. For two-dimensional processes, more precisely stochastic volatility models, the classification is achieved for a specific class called gauge-free models including the Heston model, the 3/2-model and the geometric Brownian model. We then present a new exact stochastic volatility model belonging to this class.