Asymptotic Smiles for an Affine Jump-Diffusion Model

Nian Yao, Zhiqiu Li, Zhichao Ling and Junfeng Lin

Papers from arXiv.org

Abstract: In this paper, we study the asymptotic behaviors of implied volatility of an affine jump-diffusion model. Let log stock price under risk-neutral measure follow an affine jump-diffusion model, we show that an explicit form of moment generating function for log stock price can be obtained by solving a set of ordinary differential equations. A large-time large deviation principle for log stock price is derived by applying the G\"{a}rtner-Ellis theorem. We characterize the asymptotic behaviors of the implied volatility in the large-maturity and large-strike regime using rate function in the large deviation principle. The asymptotics of the Black-Scholes implied volatility for fixed-maturity, large-strike and fixed-maturity, small-strike regimes are also studied. Numerical results are provided to validate the theoretical work.

Date: 2020-02, Revised 2020-05
New Economics Papers: this item is included in nep-rmg
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