Large deviations and stochastic volatility with jumps: asymptotic implied volatility for affine models

DOI10.1080/17442508.2012.720687zbMATH Open1298.91166arXiv1108.3998OpenAlexW3122918318MaRDI QIDQ5411908FDOQ5411908

Authors: Antoine Jacquier, Martin Keller-Ressel, Aleksandar Mijatović 

Publication date: 25 April 2014

Published in: Stochastics (Search for Journal in Brave)

Abstract: Let $sigm{a}_t(x)$ denote the implied volatility at maturity $t$ for a strike $K=S_0{e}^{xt}$, where $$ and $S_0$ is the current value of the underlying. We show that $sigm{a}_t(x)$ has a uniform (in $x$) limit as maturity $t$ tends to infinity, given by the formula $sigm{a}_{i}nfty(x)=sqrt2(h^{\ast }(x{)}^{1/2}+(h^{\ast }(x)-x{)}^{1/2})$, for $x$ in some compact neighbourhood of zero in the class of affine stochastic volatility models. The function $h^{*}$ is the convex dual of the limiting cumulant generating function $h$ of the scaled log-spot process. We express $h$ in terms of the functional characteristics of the underlying model. The proof of the limiting formula rests on the large deviation behaviour of the scaled log-spot process as time tends to infinity. We apply our results to obtain the limiting smile for several classes of stochastic volatility models with jumps used in applications (e.g. Heston with state-independent jumps, Bates with state-dependent jumps and Barndorff-Nielsen-Shephard model).

Full work available at URL: https://arxiv.org/abs/1108.3998

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zbMATH Keywords

large deviation principleaffine stochastic volatility processasymptotic implied volatilitylimiting smilestochastic volatility with jumps

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Large deviations (60F10) Stochastic models in economics (91B70)

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• A note on essential smoothness in the Heston model

Cited In (24)

• Pathwise large deviations for the rough Bergomi model
• The impact of jump distributions on the implied volatility of variance
• On the valuation of discrete Asian options in high volatility environments
• Asymptotic equivalence in Lee's moment formulas for the implied volatility, asset price models without moment explosions, and Piterbarg's conjecture
• Refined wing asymptotics for the Merton and Kou jump diffusion models
• Asymptotic behaviour of randomised fractional volatility models
• Long-time large deviations for the multiasset Wishart stochastic volatility model and option pricing
• On the curvature of the smile in stochastic volatility models
• The randomized Heston model
• The large-maturity smile for the Stein-Stein model
• Black-Scholes in a CEV random environment
• Large deviations for the extended Heston model: the large-time case
• Large-maturity regimes of the Heston forward smile
• Abelian theorems for stochastic volatility models with application to the estimation of jump activity
• Long-Time Trajectorial Large Deviations and Importance Sampling for Affine Stochastic Volatility Models
• Asymptotic behavior of the fractional Heston model
• Asymptotics of Forward Implied Volatility
• A PDE method for estimation of implied volatility
• 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
• Option pricing under the fractional stochastic volatility model
• Moment explosions and long-term behavior of affine stochastic volatility models
• General smile asymptotics with bounded maturity
• Pricing options under stochastic volatility jump model: a stable adaptive scheme

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