Option Pricing in the Moderate Deviations Regime
Pricing of Securities
2016-04-06 v1 Probability
Abstract
We consider call option prices in diffusion models close to expiry, in an asymptotic regime ("moderately out of the money") that interpolates between the well-studied cases of at-the-money options and out-of-the-money fixed-strike options. First and higher order small-time moderate deviation estimates of call prices and implied volatility are obtained. The expansions involve only simple expressions of the model parameters, and we show in detail how to calculate them for generic local and stochastic volatility models. Some numerical examples for the Heston model illustrate the accuracy of our results.
Cite
@article{arxiv.1604.01281,
title = {Option Pricing in the Moderate Deviations Regime},
author = {Peter Friz and Stefan Gerhold and Arpad Pinter},
journal= {arXiv preprint arXiv:1604.01281},
year = {2016}
}