REGULAR VARIATION AND SMILE ASYMPTOTICS

DOI10.1111/J.1467-9965.2008.00354.XMaRDI QIDQ3608732zbMATH OpenOpenAlexFDO

Authors Shalom Benaim, Peter Friz

Publication date 6 March 2009

Published in Mathematical Finance (Search for Journal in Brave)

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

zbMATH Keywords

implied volatilityregular variation

Mathematics Subject Classification ID

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

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.

Recommendations

• Smile Asymptotics II: Models with Known Moment Generating Functions
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• Asymptotic Formulas with Error Estimates for Call Pricing Functions and the Implied Volatility at Extreme Strikes

Cites work

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

Cited in

(50)

• Asymptotic behavior of the stock price distribution density and implied volatility in stochastic volatility models
• Asymptotic extrapolation of model-free implied variance: exploring structural underestimation in the VIX index
• A Black-Scholes inequality: applications and generalisations
• Parametric modeling of implied smile functions: a generalized SVI model
• Extreme-strike asymptotics for general Gaussian stochastic volatility models
• Can the implied volatility surface move by parallel shifts?
• On contingent-claim valuation in continuous-time for volatility models of Ornstein-Uhlenbeck type
• Discrete-time approximation of functionals in models of Ornstein-Uhlenbeck type, with applications to finance
• Tauberian Korevaar
• A new look at short-term implied volatility in asset price models with jumps
• Generalized arbitrage-free SVI volatility surfaces
• General smile asymptotics with bounded maturity
• Asymptotic equivalence in Lee's moment formulas for the implied volatility, asset price models without moment explosions, and Piterbarg's conjecture
• The term structure of implied volatility in symmetric models with applications to Heston
• Uniform bounds for Black-Scholes implied volatility
• The impact of jump distributions on the implied volatility of variance
• Functional analytic (ir-)regularity properties of SABR-type processes
• Asymptotic formulae for implied volatility in the Heston model
• Moment explosions and long-term behavior of affine stochastic volatility models
• IMPLIED VOLATILITY IN THE HULL-WHITE MODEL
• CREDIT SPREADS, OPTIMAL CAPITAL STRUCTURE, AND IMPLIED VOLATILITY WITH ENDOGENOUS DEFAULT AND JUMP RISK
• Asymptotic behavior of distribution densities in models with stochastic volatility. I.
• Implied volatility of basket options at extreme strikes
• A general valuation framework for SABR and stochastic local volatility models
• Shapes of implied volatility with positive mass at zero
• Mass at zero in the uncorrelated SABR model and implied volatility asymptotics
• Implied volatility in strict local martingale models
• Asymptotics of implied volatility to arbitrary order
• The large-maturity smile for the Heston model
• Asymptotics for exponential Lévy processes and their volatility smile: survey and new results
• A comparison principle between rough and non-rough Heston models -- with applications to the volatility surface
• Left-wing asymptotics of the implied volatility in the presence of atoms
• Asymptotics of Forward Implied Volatility
• On refined volatility smile expansion in the Heston model
• Smile Asymptotics II: Models with Known Moment Generating Functions
• A Stochastic Volatility Alternative to SABR
• The randomized Heston model
• Marginal density expansions for diffusions and stochastic volatility. II: Applications
• Large-maturity regimes of the Heston forward smile
• State price density estimation with an application to the recovery theorem
• Perturbation analysis of sub/super hedging problems
• W-shaped implied volatility curves and the Gaussian mixture model
• Adiabaticity conditions for volatility smile in Black-Scholes pricing model
• The log‐moment formula for implied volatility
• Option pricing in sandwiched Volterra volatility model
• The asymptotic smile of a multiscaling stochastic volatility model
• A general moment formula
• Explicit option pricing with additive processes
• When are option prices \(\mathrm{TP}_2\)?
• Stability analysis of Riccati differential equations related to affine diffusion processes

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