Small-time expansions of the distributions, densities, and option prices of stochastic volatility models with Lévy jumps

DOI10.1016/J.SPA.2012.01.013zbMATH Open1244.91089arXiv1009.4211OpenAlexW2090136014MaRDI QIDQ424503FDOQ424503

Authors: José E. Figueroa-López, Ruoting Gong, Christian Houdré 

Publication date: 1 June 2012

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: We consider a stochastic volatility model with L'evy jumps for a log-return process $Z=(Z_t{)}_{tgeq0}$ of the form $Z=U+X$, where $U=(U_t{)}_{tgeq0}$ is a classical stochastic volatility process and $X=(X_t{)}_{tgeq0}$ is an independent L'evy process with absolutely continuous L'evy measure $u$. Small-time expansions, of arbitrary polynomial order, in time-$t$, are obtained for the tails $$, $z>0$, and for the call-option prices $$, $zeq0$, assuming smoothness conditions on the {PaleGrey density of $u$} away from the origin and a small-time large deviation principle on $U$. Our approach allows for a unified treatment of general payoff functions of the form $$ for smooth functions $phi$ and $z>0$. As a consequence of our tail expansions, the polynomial expansions in $t$ of the transition densities $f_t$ are also {Green obtained} under mild conditions.

Full work available at URL: https://arxiv.org/abs/1009.4211

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zbMATH Keywords

short-time asymptoticsoption pricesstochastic volatility models with jumpstransitions densities

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Diffusion processes (60J60) Limit theorems in probability theory (60F99)

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Cited In (14)

• Small-time expansions for local jump-diffusion models with infinite jump activity
• Nonparametric implied Lévy densities
• Small-time asymptotics of stopped Lévy bridges and simulation schemes with controlled bias
• Small-time expansions for state-dependent local jump-diffusion models with infinite jump activity
• Large-maturity regimes of the Heston forward smile
• Asymptotic behavior of the stochastic Rayleigh-van der Pol equations with jumps
• High-order short-time expansions for ATM option prices of exponential Lévy models
• Small-maturity asymptotics for the at-the-money implied volatility slope in Lévy models
• Asymptotics of Forward Implied Volatility
• Small-Time Asymptotics of Option Prices and First Absolute Moments
• Short-time expansions for call options on leveraged ETFs under exponential Lévy models with local volatility
• Regularity and asymptotics of densities of inverse subordinators
• Testing and inference for fixed times of discontinuity in semimartingales
• Small-time asymptotics under local-stochastic volatility with a jump-to-default: curvature and the heat kernel expansion

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