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Smiles & Smirks: Volatility and leverage by jumps

Ballotta, L. ORCID: 0000-0002-2059-6281 and Grégory, R. (2021). Smiles & Smirks: Volatility and leverage by jumps. European Journal of Operational Research,

Abstract

We propose a novel flexible framework for the joint evolution of stock log-returns and their volatility based on time changed L ́evy process. The novelty of the approach stems from the generality of the jump structure we endow our model with, and the ability of the model to generate leverage effects out of the pure jump component. We derive the characteristic function and the forward characteristic function of the log-returns, which allow for the efficient pricing of vanilla and forward-start-like option contracts by Fourier transform methods. The proposed framework achieves robust calibration performance properties especially in the case of pure jump specifications. The results offered in this paper could have potentially interesting implications in terms of design of models and hedging strategies, and their development.

Publication Type: Article
Additional Information: © 2021. This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/ . This article has been accepted for publication in European Journal of Operational Research, Elsevier.
Publisher Keywords: Finance; Levy process; time change; option pricing; dependence.
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 16 Aug 2021 09:24
Date deposited: 16 August 2021
Date of acceptance: 14 August 2021
Date of first online publication: 2021
URI: https://openaccess.city.ac.uk/id/eprint/26594
[img] Text - Accepted Version
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Available under License Creative Commons Attribution Non-commercial No Derivatives.

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