REGULAR VARIATION AND SMILE ASYMPTOTICS

DOI10.1111/J.1467-9965.2008.00354.XzbMATH Open1155.91377arXivmath/0603146OpenAlexW2146840878MaRDI QIDQ3608732FDOQ3608732

Authors: Shalom Benaim, Peter Friz 

Publication date: 6 March 2009

Published in: Mathematical Finance (Search for Journal in Brave)

Abstract: We consider risk-neutral returns and show how their tail asymptotics translate directly to asymptotics of the implied volatility smile, thereby sharpening Roger Lee's celebrated moment formula. The theory of regular variation provides the ideal mathematical framework to formulate and prove such results. The practical value of our formulae comes from the vast literature on tail asymptotics and our conditions are often seen to be true by simple inspection of known results.

Full work available at URL: https://arxiv.org/abs/math/0603146

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zbMATH Keywords

regular variationimplied volatility

Mathematics Subject Classification ID

Probability distributions: general theory (60E05) Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic models in economics (91B70)

Cites Work

• Processes of normal inverse Gaussian type
• On the asymptotic behaviour of Lévy processes. I: Subexponential and exponential processes
• Moment explosions in stochastic volatility models
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• Mixed characteristic homological theorems in low degrees.

Cited In (47)

• The large-maturity smile for the Heston model
• Asymptotic equivalence in Lee's moment formulas for the implied volatility, asset price models without moment explosions, and Piterbarg's conjecture
• Asymptotics of implied volatility to arbitrary order
• Asymptotic formulae for implied volatility in the Heston model
• Extreme-strike asymptotics for general Gaussian stochastic volatility models
• Asymptotic behavior of distribution densities in models with stochastic volatility. I.
• A Black-Scholes inequality: applications and generalisations
• CREDIT SPREADS, OPTIMAL CAPITAL STRUCTURE, AND IMPLIED VOLATILITY WITH ENDOGENOUS DEFAULT AND JUMP RISK
• State price density estimation with an application to the recovery theorem
• A comparison principle between rough and non-rough Heston models—with applications to the volatility surface
• Large-maturity regimes of the Heston forward smile
• Implied Volatility in Strict Local Martingale Models
• Smile Asymptotics II: Models with Known Moment Generating Functions
• The Impact of Jump Distributions on the Implied Volatility of Variance
• Perturbation analysis of sub/super hedging problems
• Stability analysis of Riccati differential equations related to affine diffusion processes
• Asymptotics for exponential Lévy processes and their volatility smile: survey and new results
• Adiabaticity conditions for volatility smile in Black-Scholes pricing model
• Asymptotics of Forward Implied Volatility
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• The log‐moment formula for implied volatility
• Option pricing in sandwiched Volterra volatility model
• On refined volatility smile expansion in the Heston model
• A Stochastic Volatility Alternative to SABR
• Generalized arbitrage-free SVI volatility surfaces
• FUNCTIONAL ANALYTIC (IR-)REGULARITY PROPERTIES OF SABR-TYPE PROCESSES
• A new look at short-term implied volatility in asset price models with jumps
• Can the implied volatility surface move by parallel shifts?
• Parametric modeling of implied smile functions: a generalized SVI model
• On contingent-claim valuation in continuous-time for volatility models of Ornstein-Uhlenbeck type
• Shapes of Implied Volatility with Positive Mass at Zero
• The term structure of implied volatility in symmetric models with applications to Heston
• Tauberian Korevaar
• The asymptotic smile of a multiscaling stochastic volatility model
• A General Valuation Framework for SABR and Stochastic Local Volatility Models
• Moment explosions and long-term behavior of affine stochastic volatility models
• Uniform Bounds for Black--Scholes Implied Volatility
• W-shaped implied volatility curves and the Gaussian mixture model
• General smile asymptotics with bounded maturity
• Marginal Density Expansions for Diffusions and Stochastic Volatility II: Applications
• LEFT-WING ASYMPTOTICS OF THE IMPLIED VOLATILITY IN THE PRESENCE OF ATOMS
• Discrete-time approximation of functionals in models of Ornstein-Uhlenbeck type, with applications to finance
• Asymptotic behavior of the stock price distribution density and implied volatility in stochastic volatility models
• The Randomized Heston Model
• IMPLIED VOLATILITY IN THE HULL-WHITE MODEL
• Asymptotic extrapolation of model-free implied variance: exploring structural underestimation in the VIX index
• Implied Volatility of Basket Options at Extreme Strikes

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