City Research Online

Smiles & Smirks: Volatility and leverage by jumps

Ballotta, L. ORCID: 0000-0002-2059-6281 & Grégory, R. (2022). Smiles & Smirks: Volatility and leverage by jumps. European Journal of Operational Research, 298(3), pp. 1145-1161. doi: 10.1016/j.ejor.2021.08.023


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: © 2022. This manuscript version is made available under the CC-BY-NC-ND 4.0 license . 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
SWORD Depositor:
[thumbnail of Smile&Smirk_v11_2021.pdf]
Text - Accepted Version
Available under License Creative Commons Attribution Non-commercial No Derivatives.

Download (1MB) | Preview


Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email


Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login