REGULAR VARIATION AND SMILE ASYMPTOTICS

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

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

regular variationimplied volatility

Mathematics Subject Classification ID

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

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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Cites work

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• 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

(47)

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

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