Implied Volatility of Basket Options at Extreme Strikes

DOI10.1007/978-3-319-11605-1_6zbMATH Open1418.91516arXiv1406.0394OpenAlexW3125479236MaRDI QIDQ4560331FDOQ4560331

Archil Gulisashvili, Peter Tankov

Publication date: 11 December 2018

Published in: Springer Proceedings in Mathematics & Statistics (Search for Journal in Brave)

Abstract: In the paper, we characterize the asymptotic behavior of the implied volatility of a basket call option at large and small strikes in a variety of settings with increasing generality. First, we obtain an asymptotic formula with an error bound for the left wing of the implied volatility, under the assumption that the dynamics of asset prices are described by the multidimensional Black-Scholes model. Next, we find the leading term of asymptotics of the implied volatility in the case where the asset prices follow the multidimensional Black-Scholes model with time change by an independent increasing stochastic process. Finally, we deal with a general situation in which the dependence between the assets is described by a given copula function. In this setting, we obtain a model-free tail-wing formula that links the implied volatility to a special characteristic of the copula called the weak lower tail dependence function.

Full work available at URL: https://arxiv.org/abs/1406.0394

zbMATH Keywords

copulabasket optionsindex optionstime changeimplied volatility asymptoticslarge/small strikes

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Cites Work

• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• An introduction to copulas. Properties and applications
• Processes of normal inverse Gaussian type
• On the asymptotic behaviour of Lévy processes. I: Subexponential and exponential processes
• A new look at short-term implied volatility in asset price models with jumps
• Asymptotics of implied volatility to arbitrary order
• The Small-Maturity Smile for Exponential Lévy Models
• ASYMPTOTICS FOR EXPONENTIAL LÉVY PROCESSES AND THEIR VOLATILITY SMILE: SURVEY AND NEW RESULTS
• Analytically tractable stochastic stock price models.
• Asymptotics of sums of lognormal random variables with Gaussian copula
• Time Dependent Heston Model
• Equity correlations implied by index options: estimation and model uncertainty analysis
• Asymptotic behavior of the stock price distribution density and implied volatility in stochastic volatility models
• SMALL-TIME ASYMPTOTICS FOR IMPLIED VOLATILITY UNDER THE HESTON MODEL
• Asymptotics and calibration of local volatility models
• Robust Libor Modelling and Pricing of Derivative Products
• The large-maturity smile for the Heston model
• Asymptotics beats Monte Carlo: the case of correlated local vol baskets
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• Smile Asymptotics II: Models with Known Moment Generating Functions
• Asymptotic equivalence in Lee's moment formulas for the implied volatility, asset price models without moment explosions, and Piterbarg's conjecture
• Asymptotic Formulas with Error Estimates for Call Pricing Functions and the Implied Volatility at Extreme Strikes
• Asymptotics of Implied Volatility far from Maturity
• REGULAR VARIATION AND SMILE ASYMPTOTICS
• On multivariate Gaussian tails
• A multivariate jump-driven financial asset model
• Smart expansion and fast calibration for jump diffusions
• Asymptotic behavior of tail density for sum of correlated lognormal variables
• Tail behavior of sums and differences of log-normal random variables
• Coupling index and stocks
• Shapes of Implied Volatility with Positive Mass at Zero
• Uniform Bounds for Black--Scholes Implied Volatility
• Interest rate model calibration using semidefinite Programming
• LEFT-WING ASYMPTOTICS OF THE IMPLIED VOLATILITY IN THE PRESENCE OF ATOMS

Cited In (5)

• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• The deep parametric PDE method and applications to option pricing
• Tails of weakly dependent random vectors
• Small-Time Asymptotics for Basket Options---the Bivariate SABR Model and the Hyperbolic Heat Kernel on $\mathbb{H}^3$
• Title not available (Why is that?)

This page was built for publication: Implied Volatility of Basket Options at Extreme Strikes

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4560331)