SKEWED LÉVY MODELS AND IMPLIED VOLATILITY SKEW

Federico de Olivera (), José Fajardo () and Ernesto Mordecki ()
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Federico de Olivera: Departamento de Matemática, Centro Regional de Profesores del Sur, Consejo de Formación en Educación, Atlántida, Uruguay
Ernesto Mordecki: Centro de Matemática, Facultad de Ciencias, Universidad de la República, Montevideo, Uruguay

International Journal of Theoretical and Applied Finance (IJTAF), 2018, vol. 21, issue 02, 1-16

Abstract: We introduce skewed Lévy models, characterized by a symmetric jump measure multiplied by a damping exponential factor. These models exhibit a clear implied volatility pattern, where the damping parameter controls the implied volatility curve’s skew, resulting in a measure of the model’s skewness. We show that the variation of this parameter produces the typical smirk observed in implied volatility curves. Some theoretical facts supporting these findings are proved.

Keywords: Skewness; Lévy processes; implied volatility smirk (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S0219024918500036

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