Approximation and Calibration of Short-Term Implied Volatilities Under Jump-Diffusion Stochastic Volatility

Browse by...

Deposit

Highlights

More informations

Title		Approximation and Calibration of Short-Term Implied Volatilities Under Jump-Diffusion Stochastic Volatility
Authors		Medvedev, Alexey Scaillet, Olivier
Published in		Review of Financial Studies. 2007, vol. 20, no. 2, p. 427-459
Abstract		We derive an asymptotic expansion formula for option implied volatility under a two-factor jump-diffusion stochastic volatility model when time-to-maturity is small. We further propose a simple calibration procedure of an arbitrary parametric model to short-term near-the-money implied volatilities. An important advantage of our approximation is that it is free of the unobserved spot volatility. Therefore, the model can be calibrated on option data pooled across different calendar dates to extract information from the dynamics of the implied volatility smile. An example of calibration to a sample of S&P 500 option prices is provided.
Keywords		Option pricing — Stochastic volatility — Asymptotic approximation — Jump-diffusion
Identifiers		DOI: 10.1093/rfs/hhl013
Full text		Article (Author postprint) (656 Kb) - Free access
Structures		Faculté d'économie et de management
Research group		Geneva Finance Research Institute (GFRI)
Citation (ISO format)		MEDVEDEV, Alexey, SCAILLET, Olivier. Approximation and Calibration of Short-Term Implied Volatilities Under Jump-Diffusion Stochastic Volatility. In: Review of Financial Studies, 2007, vol. 20, n° 2, p. 427-459. doi: 10.1093/rfs/hhl013 https://archive-ouverte.unige.ch/unige:79885