The small-maturity smile for exponential Lévy models

DOI10.1137/110820658MaRDI QIDQ4902204zbMATH OpenOpenAlexFDO

Authors José E. Figueroa-López, Martin Forde

Publication date 25 January 2013

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1105.3180

zbMATH Keywords

exponential Lévy modelsimplied volatilityoption pricingshort-time asymptoticstime-changed Lévy models

Mathematics Subject Classification ID

Limit theorems in probability theory (60F99) Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We derive a small-time expansion for out-of-the-money call options under an exponential Levy model, using the small-time expansion for the distribution function given in Figueroa-Lopez & Houdre (2009), combined with a change of num'eraire via the Esscher transform. In particular, we quantify find that the effect of a non-zero volatility $sigma$ of the Gaussian component of the driving L'{e}vy process is to increase the call price by $1/2sigm{a}^2{t}^2{e}^{k}u(k)(1+o(1))$ as $to0$, where $u$ is the L'evy density. Using the small-time expansion for call options, we then derive a small-time expansion for the implied volatility, which sharpens the first order estimate given in Tankov (2010). Our numerical results show that the second order approximation can significantly outperform the first order approximation. Our results are also extended to a class of time-changed L'evy models. We also consider a small-time, small log-moneyness regime for the CGMY model, and apply this approach to the small-time pricing of at-the-money call options.

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(31)

• Small-time expansions for state-dependent local jump-diffusion models with infinite jump activity
• Short-time expansions for close-to-the-money options under a Lévy jump model with stochastic volatility
• A new look at short-term implied volatility in asset price models with jumps
• General smile asymptotics with bounded maturity
• Short Maturity Asian Options in Local Volatility Models
• Small-time asymptotics under local-stochastic volatility with a jump-to-default: curvature and the heat kernel expansion
• Small-Time Asymptotics of Option Prices and First Absolute Moments
• Short-term asymptotics for the implied volatility skew under a stochastic volatility model with Lévy jumps
• Small-time asymptotics of stopped Lévy bridges and simulation schemes with controlled bias
• Small-time expansions for local jump-diffusion models with infinite jump activity
• Small-time expansions of the distributions, densities, and option prices of stochastic volatility models with Lévy jumps
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• Pathwise large deviations for the rough Bergomi model
• Short-time expansions for call options on leveraged ETFs under exponential Lévy models with local volatility
• Small-maturity asymptotics for the at-the-money implied volatility slope in Lévy models
• Asymptotics of implied volatility to arbitrary order
• Small-maturity digital options in Lévy models: an analytic approach
• Rough volatility and CGMY jumps with a finite history and the rough Heston model -- small-time asymptotics in the \(k\sqrt{t}\) regime
• SHORT MATURITY ASIAN OPTIONS FOR THE CEV MODEL
• Asymptotic behavior and calibration of short-time option prices under the normal tempered stable model
• Short-time implied volatility in exponential Lévy models
• Third-order short-time expansions for close-to-the-money option prices under the CGMY model
• High-order short-time expansions for ATM option prices of exponential Lévy models
• SHORT-MATURITY ASYMPTOTICS FOR OPTION PRICES WITH INTEREST RATE EFFECTS
• Closed-form option pricing for exponential Lévy models: a residue approach
• The economics of time as it is embedded in the prices of options§
• Short-time implied volatility of additive normal tempered stable processes
• Asymptotics for short maturity Asian options in jump-diffusion models with local volatility
• Some asymptotics for short maturity Asian options
• On the implied volatility skew outside the at-the-money point
• Small-time asymptotics for Gaussian self-similar stochastic volatility models

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