On the Skew and Curvature of the Implied and Local Volatilities

DOI10.1080/1350486X.2023.2261459MaRDI QIDQ6092915zbMATH OpenOpenAlexFDO

Authors Elisa Alòs, David García Lorite

Publication date 23 November 2023

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2205.11185

zbMATH Keywords

local volatilityMalliavin calculusrough volatilitystochastic volatility

Mathematics Subject Classification ID

Stochastic calculus of variations and the Malliavin calculus (60H07) Financial markets (91G15)

Abstract: In this paper, we study the relationship between the short-end of the local and the implied volatility surfaces. Our results, based on Malliavin calculus techniques, recover the recent $frac1H+3/2$ rule (where $H$ denotes the Hurst parameter of the volatility process) for rough volatilitites (see Bourgey, De Marco, Friz, and Pigato (2022)), that states that the short-time skew slope of the at-the-money implied volatility is $frac1H+3/2$ the corresponding slope for local volatilities. Moreover, we see that the at-the-money short-end curvature of the implied volatility can be written in terms of the short-end skew and curvature of the local volatility and viceversa, and that this relationship depends on $H$.

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Cites work

• A rough SABR formula
• IMPLIED AND LOCAL VOLATILITIES UNDER STOCHASTIC VOLATILITY
• Malliavin calculus in finance. Theory and practice. With a foreword by Dariusz Gatarek
• Mimicking the one-dimensional marginal distributions of processes having an Ito differential
• On the curvature of the smile in stochastic volatility models
• On the short-time behavior of the implied volatility for jump-diffusion models with stochastic volatility
• Pricing under rough volatility
• The Malliavin Calculus and Related Topics

Cited in

(5)

• Implied volatility and skewness surface
• SKEWED LÉVY MODELS AND IMPLIED VOLATILITY SKEW
• The implied volatility of Forward-Start options: ATM short-time level, skew and curvature
• Local volatility under rough volatility
• Computing the SSR

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