Small time central limit theorems for semimartingales with applications
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Publication:2804007
central limit theoremfunctional central limit theoremstochastic differential equationssemimartingalesimplied volatility skewdigital option
Derivative securities (option pricing, hedging, etc.) (91G20) Central limit and other weak theorems (60F05) Functional limit theorems; invariance principles (60F17) Generalizations of martingales (60G48) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Financial applications of other theories (91G80)
Abstract: We give conditions under which the normalized marginal distribution of a semimartingale converges to a Gaussian limit law as time tends to zero. In particular, our result is applicable to solutions of stochastic differential equations with locally bounded and continuous coefficients. The limit theorems are subsequently extended to functional central limit theorems on the process level. We present two applications of the results in the field of mathematical finance: to the pricing of at-the-money digital options with short maturities and short time implied volatility skews.
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Cited in
(4)- Density estimates and central limit theorem for the functional of fractional SDEs
- Small-maturity asymptotics for the at-the-money implied volatility slope in Lévy models
- Itô differential representation of singular stochastic Volterra integral equations
- Note on the weak convergence of hyperplane \(\alpha\)-quantile functionals and their continuity in the Skorokhod J1 topology
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