Related papers: Smile Modelling in Commodity Markets

In this paper we provide a comprehensive analysis of a structural model for the dynamics of prices of assets traded in a market originally proposed in [1]. The model takes the form of an interacting generalization of the geometric Brownian…

The paper demonstrates that a pure-diffusion 3/2 model is able to capture the observed upward-sloping implied volatility skew in VIX options. This observation contradicts a common perception in the literature that jumps are required for the…

Time variation and persistence are crucial properties of volatility that are often studied separately in energy volatility forecasting models. Here, we propose a novel approach that allows shocks with heterogeneous persistence to vary…

This paper studies equity basket options -- i.e., multi-dimensional derivatives whose payoffs depend on the value of a weighted sum of the underlying stocks -- and develops a new and innovative approach to ensure consistency between options…

We consider risk-neutral returns and show how their tail asymptotics translate directly to asymptotics of the implied volatility smile, thereby sharpening Roger Lee's celebrated moment formula. The theory of regular variation provides the…

We examine a general multi-factor model for commodity spot prices and futures valuation. We extend the multi-factor long-short model in Schwartz and Smith (2000) and Yan (2002) in two important aspects: firstly we allow for both the long…

We propose a multi-scale stochastic volatility model in which a fast mean-reverting factor of volatility is built on top of the Heston stochastic volatility model. A singular pertubative expansion is then used to obtain an approximation for…

We introduce Hermite fractional financial markets, where market uncertainties are described by multidimensional Hermite motions. Hermite markets include as particular cases financial markets driven by multivariate fractional Brownian motion…

There is a well developed framework, the Black-Scholes theory, for the pricing of contracts based on the future prices of certain assets, called options. This theory assumes that the probability distribution of the returns of the underlying…

We introduce a new class of continuous-time models of the stochastic volatility of asset prices. The models can simultaneously incorporate roughness and slowly decaying autocorrelations, including proper long memory, which are two stylized…

In a rather general setting of multivariate stochastic volatility market models we derive global iterative probabilistic schemes for computing the free boundary and its Greeks for a generic class of American derivative models using…

We derive a new, exact and transparent expansion for option smiles, which lends itself both to analytical approximation and, perhaps more importantly, to congenial numerical treatments. We show that the skew and the curvature of the smile…

The pricing of derivatives tied to baskets of assets demands a sophisticated framework that aligns with the available market information to capture the intricate non-linear dependency structure among the assets. We describe the dynamics of…

We study the pricing and hedging of derivative securities with uncertainty about the volatility of the underlying asset. Rather than taking all models from a prespecified class equally seriously, we penalise less plausible ones based on…

The literature on volatility modelling and option pricing is a large and diverse area due to its importance and applications. This paper provides a review of the most significant volatility models and option pricing methods, beginning with…

The Heston stochastic volatility model is a standard model for valuing financial derivatives, since it can be calibrated using semi-analytical formulas and captures the most basic structure of the market for financial derivatives with…

We introduce a class of randomly time-changed fast mean-reverting stochastic volatility models and, using spectral theory and singular perturbation techniques, we derive an approximation for the prices of European options in this setting.…

Based on forward curves modelled as Hilbert-space valued processes, we analyse the pricing of various options relevant in energy markets. In particular, we connect empirical evidence about energy forward prices known from the literature to…

Empirical studies have emphasized that the equity implied volatility is characterized by a negative skew inversely proportional to the square root of the time-to-maturity. We examine the short-time-to-maturity behavior of the implied…

We discuss the possibility of obtaining model-free bounds on volatility derivatives, given present market data in the form of a calibrated local volatility model. A counter-example to a wide-spread conjecture is given.