Moment explosions, implied volatility and local volatility at extreme strikes

Sidi Mohamed Aly

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arXiv · 1601.06995

Moment explosions, implied volatility and local volatility at extreme strikes

Sidi Mohamed Aly

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Abstract

We consider a stochastic volatility model where the moment generating function of the logarithmic price is finite only on part of the real line. Using a new Tauberian result obtained in [1] and [2], we show that the knowledge of the moment generating function near its critical moment gives a sharp asymptotic expansion (with an error of order o(1)) of the local volatility and implied volatility for small and large strikes. We apply our theoretical estimates to Gatheral's SVI parametrization of the implied volatility and Heston's model.

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Sidi Mohamed Aly. 2016-08-05. Moment explosions, implied volatility and local volatility at extreme strikes. https://arxiv.org/abs/1601.06995

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