Small time central limit theorems for semimartingales with applications

Stefan Gerhold, Max Kleinert, Piet Porkert and Mykhaylo Shkolnikov

Papers from arXiv.org

Abstract: We give conditions under which the normalized marginal distribution of a semimartingale converges to a Gaussian limit law as time tends to zero. In particular, our result is applicable to solutions of stochastic differential equations with locally bounded and continuous coefficients. The limit theorems are subsequently extended to functional central limit theorems on the process level. We present two applications of the results in the field of mathematical finance: to the pricing of at-the-money digital options with short maturities and short time implied volatility skews.

Date: 2012-08
New Economics Papers: this item is included in nep-ecm and nep-ets
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