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

Alexey Medvedev and Olivier Scaillet
Additional contact information
Alexey Medvedev: Universtity of Geneva

No 06-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We derive a closed-form asymptotic expansion formula for option implied volatility under a two-factor jump-diffusion stochastic volatility model when time-to-maturity is small. Based on numerical experiments we describe the range of time-to-maturity and moneyness for which the approximation is accurate. 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 in order to extract information from the dynamics of the implied volatility smile. An example of calibration to a sample of S&P500 option prices is provided. We find that jumps are significant. The evidence also supports an affine specification for the jump intensity and Constant-Elasticity-of-Variance for the dynamics of the return volatility.

Keywords: Option pricing; stochastic volatility; asymptotic approximation; jump-diffusion (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2006-01
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=910212 (application/pdf)

Related works:
Journal Article: Approximation and Calibration of Short-Term Implied Volatilities Under Jump-Diffusion Stochastic Volatility (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0608

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().