Smart expansion and fast calibration for jump diffusions
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Abstract: Using Malliavin calculus techniques, we derive an analytical formula for the price of European options, for any model including local volatility and Poisson jump process. We show that the accuracy of the formula depends on the smoothness of the payoff function. Our approach relies on an asymptotic expansion related to small diffusion and small jump frequency/size. Our formula has excellent accuracy (the error on implied Black-Scholes volatilities for call option is smaller than 2 bp for various strikes and maturities). Additionally, model calibration becomes very rapid.
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Cites work
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Cited in
(33)- Asymptotic expansion of a nonlinear oscillator with a jump-diffusion process
- A decomposition formula for option prices in the Heston model and applications to option pricing approximation
- Double discretization difference schemes for partial integrodifferential option pricing jump diffusion models
- Pricing approximations and error estimates for local Lévy-type models with default
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- The complete Gaussian kernel in the multi-factor Heston model: option pricing and implied volatility applications
- Asymptotic expansion for a Black-Scholes model with small noise stochastic jump-diffusion interest rate
- Pricing discretely monitored barrier options: when Malliavin calculus expansions meet Hilbert transforms
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- Expansion formulas for European options in a local volatility model
- Implied volatility of basket options at extreme strikes
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- New approximations in local volatility models
- Approximate indifference pricing in exponential Lévy models
- Expansion formulas for European quanto options in a local volatility FX-LIBOR model
- Approximate option pricing in the Lévy Libor model
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