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Short-time expansions for close-to-the-money options under a Lévy jump model with stochastic volatility

Author

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  • José Figueroa-López
  • Sveinn Ólafsson

Abstract

In Figueroa-López et al. (Math. Finance, 2013 ), a second order approximation for at-the-money option prices is derived for a large class of exponential Lévy models, with or without a Brownian component. The purpose of the present article is twofold. First, we relax the regularity conditions imposed on the Lévy density to the weakest possible conditions for such an expansion to be well defined. Second, we show that the formulas extend both to the case of “close-to-the-money” strikes and to the case where the continuous Brownian component is replaced by an independent stochastic volatility process with leverage. Copyright Springer-Verlag Berlin Heidelberg 2016

Suggested Citation

  • José Figueroa-López & Sveinn Ólafsson, 2016. "Short-time expansions for close-to-the-money options under a Lévy jump model with stochastic volatility," Finance and Stochastics, Springer, vol. 20(1), pages 219-265, January.
    • Handle: RePEc:spr:finsto:v:20:y:2016:i:1:p:219-265
    DOI: 10.1007/s00780-015-0281-z
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    References listed on IDEAS

    as
    1. Johannes Muhle-Karbe & Marcel Nutz, 2010. "Small-Time Asymptotics of Option Prices and First Absolute Moments," Papers 1006.2294, arXiv.org, revised Jun 2011.
    2. Rosenbaum, Mathieu & Tankov, Peter, 2011. "Asymptotic results for time-changed Lévy processes sampled at hitting times," Stochastic Processes and their Applications, Elsevier, vol. 121(7), pages 1607-1632, July.
    3. Kun Gao & Roger Lee, 2014. "Asymptotics of implied volatility to arbitrary order," Finance and Stochastics, Springer, vol. 18(2), pages 349-392, April.
    4. Jos'e E. Figueroa-L'opez & Ruoting Gong & Christian Houdr'e, 2012. "High-order short-time expansions for ATM option prices of exponential L\'evy models," Papers 1208.5520, arXiv.org, revised Apr 2014.
    5. Leif Andersen & Alexander Lipton, 2013. "Asymptotics For Exponential Lévy Processes And Their Volatility Smile: Survey And New Results," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(01), pages 1-98.
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    Citations

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    Cited by:

    1. Todorov, Viktor & Zhang, Yang, 2023. "Bias reduction in spot volatility estimation from options," Journal of Econometrics, Elsevier, vol. 234(1), pages 53-81.
    2. Martin Forde & Hongzhong Zhang, 2016. "Asymptotics for rough stochastic volatility models," Papers 1610.08878, arXiv.org, revised Mar 2021.

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    More about this item

    Keywords

    Exponential Lévy models; Stochastic volatility models; Short-time asymptotics; ATM option pricing; Implied volatility; 60G51; 60F99; 91G20; C6;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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