English

From characteristic functions to implied volatility expansions

Computational Finance 2014-06-26 v5 General Finance Pricing of Securities

Abstract

For any strictly positive martingale S=exp(X)S = \exp(X) for which XX has a characteristic function, we provide an expansion for the implied volatility. This expansion is explicit in the sense that it involves no integrals, but only polynomials in the log strike. We illustrate the versatility of our expansion by computing the approximate implied volatility smile in three well-known martingale models: one finite activity exponential L\'evy model (Merton), one infinite activity exponential L\'evy model (Variance Gamma), and one stochastic volatility model (Heston). Finally, we illustrate how our expansion can be used to perform a model-free calibration of the empirically observed implied volatility surface.

Keywords

Cite

@article{arxiv.1207.0233,
  title  = {From characteristic functions to implied volatility expansions},
  author = {Antoine Jacquier and Matthew Lorig},
  journal= {arXiv preprint arXiv:1207.0233},
  year   = {2014}
}

Comments

21 pages, 4 figures

R2 v1 2026-06-21T21:28:48.178Z