Small-Time Asymptotics of Option Prices and First Absolute Moments

DOI10.1239/JAP/1324046015MaRDI QIDQ3108470zbMATH OpenOpenAlexFDO

Authors Johannes Muhle-Karbe, Marcel Nutz

Publication date 4 January 2012

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

Full work available at URL https://arxiv.org/abs/1006.2294

zbMATH Keywords

absolute momentapproximation by Lévy processesoption pricesmall-time asymptotics

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We study the leading term in the small-time asymptotics of at-the-money call option prices when the stock price process $S$ follows a general martingale. This is equivalent to studying the first centered absolute moment of $S$. We show that if $S$ has a continuous part, the leading term is of order $sqrtT$ in time $T$ and depends only on the initial value of the volatility. Furthermore, the term is linear in $T$ if and only if $S$ is of finite variation. The leading terms for pure-jump processes with infinite variation are between these two cases; we obtain their exact form for stable-like small jumps. To derive these results, we use a natural approximation of $S$ so that calculations are necessary only for the class of L'evy processes.

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Cited in

(29)

• Small-time expansions for state-dependent local jump-diffusion models with infinite jump activity
• Asymptotic and exact pricing of options on variance
• Testing and inference for fixed times of discontinuity in semimartingales
• Asymptotic power utility-based pricing and hedging
• Nonparametric spot volatility from options
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• Short-time near-the-money skew in rough fractional volatility models
• Asymptotics of Forward Implied Volatility
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• Asymptotics for short maturity Asian options in jump-diffusion models with local volatility
• Nonparametric implied Lévy densities
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