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

DOI10.1080/17442508.2012.720687MaRDI QIDQ5411908zbMATH OpenOpenAlexFDO

Authors Antoine Jacquier, Martin Keller-Ressel, Aleksandar Mijatović

Publication date 25 April 2014

Published in Stochastics (Search for Journal in Brave)

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

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)

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 $h^{\ast }$ 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).

Recommendations

• Large deviations for the extended Heston model: the large-time case
• The impact of jump distributions on the implied volatility of variance
• General smile asymptotics with bounded maturity
• Moment explosions and long-term behavior of affine stochastic volatility models
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Cites work

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• Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics. (With discussion)
• Post-'87 crash fears in the S\&P 500 futures option market
• The large-maturity smile for the Heston model

Cited in

(25)

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

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