Closed-form implied volatility surfaces for stochastic volatility models with jumps

Yacine Ait-Sahalia, Chenxu Li and Chen Xu Li

Journal of Econometrics, 2021, vol. 222, issue 1, 364-392

Abstract: We develop a closed-form bivariate expansion of the shape characteristics of the implied volatility surface generated by a stochastic volatility model with jumps in returns. We use the expansion to analyse the impact on the shape of the implied volatility surface of the various features of the stochastic volatility model and to determine which stochastic volatility models are capable of reproducing the observed characteristics of the implied volatility market data.

Keywords: Implied volatility surface; Stochastic volatility; Jumps; Option pricing; Closed-form expansion; Model selection (search for similar items in EconPapers)
JEL-codes: C51 C52 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:222:y:2021:i:1:p:364-392

DOI: 10.1016/j.jeconom.2020.07.006

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