English

The Log Moment formula for implied volatility

Pricing of Securities 2021-01-21 v1 Probability

Abstract

We revisit the foundational Moment Formula proved by Roger Lee fifteen years ago. We show that when the underlying stock price martingale admits finite log-moments E[|log(S)|^q] for some positive q, the arbitrage-free growth in the left wing of the implied volatility smile is less constrained than Lee's bound. The result is rationalised by a market trading discretely monitored variance swaps wherein the payoff is a function of squared log-returns, and requires no assumption for the underlying martingale to admit any negative moment. In this respect, the result can derived from a model-independent setup. As a byproduct, we relax the moment assumptions on the stock price to provide a new proof of the notorious Gatheral-Fukasawa formula expressing variance swaps in terms of the implied volatility.

Keywords

Cite

@article{arxiv.2101.08145,
  title  = {The Log Moment formula for implied volatility},
  author = {Vimal Raval and Antoine Jacquier},
  journal= {arXiv preprint arXiv:2101.08145},
  year   = {2021}
}

Comments

12 pages

R2 v1 2026-06-23T22:21:17.307Z