Smile Asymptotics II: Models with Known Moment Generating Functions

DOI10.1239/JAP/1208358948zbMATH Open1151.62079arXivmath/0608619OpenAlexW1981168607MaRDI QIDQ5459905FDOQ5459905

Authors: Shalom Benaim, Peter Friz 

Publication date: 30 April 2008

Published in: Journal of Applied Probability (Search for Journal in Brave)

Abstract: In a recent article the authors obtained a formula which relates explicitly the tail of risk neutral returns with the wing behavior of the Black Scholes implied volatility smile. In situations where precise tail asymptotics are unknown but a moment generating function is available we first establish, under easy-to-check conditions, tail asymptoics on logarithmic scale as soft applications of standard Tauberian theorems. Such asymptotics are enough to make the tail-wing formula work and we so obtain a version of Lee's moment formula with the novel guarantee that there is indeed a limiting slope when plotting implied variance against log-strike. We apply these results to time-changed Levy models and the Heston model. In particular, the term-structure of the wings can be analytically understood.

Full work available at URL: https://arxiv.org/abs/math/0608619

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zbMATH Keywords

Tauberian theoryimplied volatility smiletail-wing formula

Mathematics Subject Classification ID

Statistics of extreme values; tail inference (62G32) Applications of statistics to actuarial sciences and financial mathematics (62P05) Signal detection and filtering (aspects of stochastic processes) (60G35) Tauberian theorems (40E05) Stochastic models in economics (91B70)

Cites Work

• Financial Modelling with Jump Processes
• Normal Variance-Mean Mixtures and z Distributions
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• Moment explosions in stochastic volatility models
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• Smile Asymptotics II: Models with Known Moment Generating Functions
• Application of Tauberian Theorem to the Exponential Decay of the Tail Probability of a Random Variable

Cited In (29)

• Asymptotic equivalence in Lee's moment formulas for the implied volatility, asset price models without moment explosions, and Piterbarg's conjecture
• Asymptotics of implied volatility to arbitrary order
• Asymptotic formulae for implied volatility in the Heston model
• Extreme-strike asymptotics for general Gaussian stochastic volatility models
• Large deviations for the boundary local time of doubly reflected Brownian motion
• REGULAR VARIATION AND SMILE ASYMPTOTICS
• Large-maturity regimes of the Heston forward smile
• Long-term and blow-up behaviors of exponential moments in multi-dimensional affine diffusions
• Smile Asymptotics II: Models with Known Moment Generating Functions
• The Impact of Jump Distributions on the Implied Volatility of Variance
• Perturbation analysis of sub/super hedging problems
• Asymptotics for exponential Lévy processes and their volatility smile: survey and new results
• Asymptotics of Forward Implied Volatility
• The log‐moment formula for implied volatility
• On refined volatility smile expansion in the Heston model
• EFFECTIVE ASYMPTOTICS ANALYSIS FOR FINANCE
• Integrated density of states of the Anderson Hamiltonian with two-dimensional white noise
• Tauberian Korevaar
• On the law of terminal value of additive martingales in a remarkable branching stable process
• Uniform Bounds for Black--Scholes Implied Volatility
• General smile asymptotics with bounded maturity
• Extreme-Strike Comparisons and Structural Bounds for SPX and VIX Options
• Marginal Density Expansions for Diffusions and Stochastic Volatility II: Applications
• LEFT-WING ASYMPTOTICS OF THE IMPLIED VOLATILITY IN THE PRESENCE OF ATOMS
• From Moment Explosion to the Asymptotic Behavior of the Cumulative Distribution for a Random Variable
• The Randomized Heston Model
• Small-Maturity Asymptotics for the At-The-Money Implied Volatility Slope in Lévy Models
• On Properties of the MixedTS Distribution and Its Multivariate Extension
• Implied Volatility of Basket Options at Extreme Strikes

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