Distinguished Limits of Levy-Stable Processes, and Applications to Option Pricing

Álvaro Cartea () and Sam Howison

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: In this paper we derive analytic expressions for the value of European Put and Call options when the stock process follows an exponential Levy-Stable process. It is shown that the generalised Black-Scholes operator for the Levy-Stable case can be obtained as an asymptotic approximation of a process where the random variable follows a damped Levy process. Finally, it is also shown that option prices under the Levy-Stable case generate the volatility smile encountered in the financial markets when the Black-Scholes framework is employed.

Date: 2002
New Economics Papers: this item is included in nep-ets, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (5)

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