A note on essential smoothness in the Heston model
Pricing of Securities
2011-07-26 v1 Probability
Abstract
This note studies an issue relating to essential smoothness that can arise when the theory of large deviations is applied to a certain option pricing formula in the Heston model. The note identifies a gap, based on this issue, in the proof of Corollary 2.4 in \cite{FordeJacquier10} and describes how to circumvent it. This completes the proof of Corollary 2.4 in \cite{FordeJacquier10} and hence of the main result in \cite{FordeJacquier10}, which describes the limiting behaviour of the implied volatility smile in the Heston model far from maturity.
Cite
@article{arxiv.1107.4881,
title = {A note on essential smoothness in the Heston model},
author = {Martin Forde and Antoine Jacquier and Aleksandar Mijatovic},
journal= {arXiv preprint arXiv:1107.4881},
year = {2011}
}
Comments
5 pages; a version of this note is to appear in Finance & Stochastics