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Q432231
label / enlabel / en
The exact Taylor formula of the implied volatility
description / endescription / en
scientific article
Property / instance of
 
Property / instance of: scholarly article / rank
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Property / title
The exact Taylor formula of the implied volatility (English)
 
Property / title: The exact Taylor formula of the implied volatility (English) / rank
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Property / zbMATH Open document ID
 
Property / zbMATH Open document ID: 1414.91385 / rank
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Property / DOI
 
Property / DOI: 10.1007/s00780-017-0330-x / rank
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Property / author
 
Property / author: Stefano Pagliarani / rank
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Property / author
 
Property / author: Andrea Pascucci / rank
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Property / published in
 
Property / published in: Finance and Stochastics / rank
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Property / publication date
21 July 2017
Timestamp+2017-07-21T00:00:00Z
Timezone+00:00
Calendar⧼valueview-expert-timevalue-calendar-gregorian⧽
Precision1 day
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After0
 
Property / publication date: 21 July 2017 / rank
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Property / full work available at URL
 
Property / full work available at URL: https://arxiv.org/abs/1510.06084 / rank
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Property / review text
In this work, a model driven by a multidimensional local diffusion (a Feller process which is also an inhomogeneous local diffusion) is studied, and an exact Taylor formula for implied volatility \(\sigma=\sigma(t,x; T,k)\) related to a call option with log-strike \(k\), maturity \(T\) and log-price \(x\) of the underlying asset at time \(t\) is proved. The obtained exact Taylor formula holds in a parabolic region of \((T,k)\) close to expiry and at-the-money, namely \(|x-k|\leq \lambda\sqrt{T-t}\) for an arbitrary \(\lambda>0\). The results are proved under mild conditions and apply to many popular models, including CEV, Heston and SABR, among others. Also, one can use them to study asymptotic behaviour of IV generated by VIX options where vertical limits (with \(T\to t+\) and \(k\) fixed) known in the literature are not sufficient. The main idea is to obtain sharp bounds on the difference between \(\sigma\) (resp. its derivatives \(\partial^q_T\partial^m_k \sigma\)) and a fully explicit approximation \(\bar{\sigma}\) (resp. its derivatives \(\partial^q_T\partial^m_k \bar{\sigma}\)) as \((T,k)\to(t,x)\) within the considered region. Here \(2q+m\leq N\) and \(N\) is the order of approximation. The approximation \(\bar{\sigma}\) was introduced and studied in an earlier paper by \textit{M. Lorig} et al. [Math. Finance 27, No. 3, 926--960 (2017; Zbl 1422.91713)].
 
Property / review text: In this work, a model driven by a multidimensional local diffusion (a Feller process which is also an inhomogeneous local diffusion) is studied, and an exact Taylor formula for implied volatility \(\sigma=\sigma(t,x; T,k)\) related to a call option with log-strike \(k\), maturity \(T\) and log-price \(x\) of the underlying asset at time \(t\) is proved. The obtained exact Taylor formula holds in a parabolic region of \((T,k)\) close to expiry and at-the-money, namely \(|x-k|\leq \lambda\sqrt{T-t}\) for an arbitrary \(\lambda>0\). The results are proved under mild conditions and apply to many popular models, including CEV, Heston and SABR, among others. Also, one can use them to study asymptotic behaviour of IV generated by VIX options where vertical limits (with \(T\to t+\) and \(k\) fixed) known in the literature are not sufficient. The main idea is to obtain sharp bounds on the difference between \(\sigma\) (resp. its derivatives \(\partial^q_T\partial^m_k \sigma\)) and a fully explicit approximation \(\bar{\sigma}\) (resp. its derivatives \(\partial^q_T\partial^m_k \bar{\sigma}\)) as \((T,k)\to(t,x)\) within the considered region. Here \(2q+m\leq N\) and \(N\) is the order of approximation. The approximation \(\bar{\sigma}\) was introduced and studied in an earlier paper by \textit{M. Lorig} et al. [Math. Finance 27, No. 3, 926--960 (2017; Zbl 1422.91713)]. / rank
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Property / reviewed by
 
Property / reviewed by: Martynas Manstavičius / rank
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Property / Mathematics Subject Classification ID
 
Property / Mathematics Subject Classification ID: 91G20 / rank
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Property / Mathematics Subject Classification ID
 
Property / Mathematics Subject Classification ID: 60J60 / rank
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Property / Mathematics Subject Classification ID
 
Property / Mathematics Subject Classification ID: 60J70 / rank
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Property / zbMATH DE Number
 
Property / zbMATH DE Number: 6751103 / rank
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Property / zbMATH Keywords
implied volatility
 
Property / zbMATH Keywords: implied volatility / rank
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Property / zbMATH Keywords
local-stochastic volatility
 
Property / zbMATH Keywords: local-stochastic volatility / rank
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Property / zbMATH Keywords
local diffusions
 
Property / zbMATH Keywords: local diffusions / rank
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Property / zbMATH Keywords
Feller process
 
Property / zbMATH Keywords: Feller process / rank
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Property / MaRDI profile type
 
Property / MaRDI profile type: MaRDI publication profile / rank
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