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

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

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

Recommendations

• Small-time expansions for local jump-diffusion models with infinite jump activity
• Small-time asymptotics for fast mean-reverting stochastic volatility models
• Short-time expansions for close-to-the-money options under a Lévy jump model with stochastic volatility
• Lévy processes driven by stochastic volatility
• Small-time expansions for state-dependent local jump-diffusion models with infinite jump activity

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)

Cites Work

• Financial Modelling with Jump Processes
• Title not available (Why is that?)
• Tempering stable processes
• Title not available (Why is that?)
• Title not available (Why is that?)
• Testing for jumps in a discretely observed process
• Pricing and Hedging in Exponential Lévy Models: Review of Recent Results
• Short-Maturity Asymptotics for a Fast Mean-Reverting Heston Stochastic Volatility Model
• Title not available (Why is that?)
• Small-time expansions for the transition distributions of Lévy processes
• Expansion of transition distributions of Lévy processes in small time
• Closed-form likelihood expansions for multivariate diffusions
• Small-Time Asymptotics of Option Prices and First Absolute Moments
• Analysis, Geometry, and Modeling in Finance
• The Small-Maturity Smile for Exponential Lévy Models
• Closed-form likelihood approximation and estimation of jump-diffusions with an application to the realignment risk of the Chinese yuan
• Computing the implied volatility in stochastic volatility models
• SMALL-TIME ASYMPTOTICS FOR IMPLIED VOLATILITY UNDER THE HESTON MODEL
• ASYMPTOTICS OF IMPLIED VOLATILITY IN LOCAL VOLATILITY MODELS
• Is Brownian motion necessary to model high-frequency data?
• Asymptotics and calibration of local volatility models
• Small time expansions for transition probabilities of some Lévy processes
• Small-Time Asymptotics for an Uncorrelated Local-Stochastic Volatility Model
• Title not available (Why is that?)
• Interpolation, correlation identities, and inequalities for infinitely divisible variables
• Density in small time for Lévy processes

Cited In (13)

• Small-time expansions for local jump-diffusion models with infinite jump activity
• Nonparametric implied Lévy densities
• HIGH‐ORDER SHORT‐TIME EXPANSIONS FOR ATM OPTION PRICES OF EXPONENTIAL LÉVY MODELS
• Short-Time Expansions for Call Options on Leveraged ETFs Under Exponential Lévy Models with Local Volatility
• Small-Time Asymptotics under Local-Stochastic Volatility with a Jump-to-Default: Curvature and the Heat Kernel Expansion
• Small-time asymptotics of stopped Lévy bridges and simulation schemes with controlled bias
• Large-maturity regimes of the Heston forward smile
• Asymptotic behavior of the stochastic Rayleigh-van der Pol equations with jumps
• Asymptotics of Forward Implied Volatility
• Small-Time Asymptotics of Option Prices and First Absolute Moments
• Regularity and asymptotics of densities of inverse subordinators
• Testing and inference for fixed times of discontinuity in semimartingales
• Small-Maturity Asymptotics for the At-The-Money Implied Volatility Slope in Lévy Models

This page was built for publication: Small-time expansions of the distributions, densities, and option prices of stochastic volatility models with Lévy jumps

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q424503)