Smile Asymptotics II: Models with Known Moment Generating Function

Details Smile Asymptotics II: Models with Known Moment Generating Function Smile Asymptotics II: Models with Known Moment Generating Function

2006-08-24

arxiv.org/abs/math/0608619v1

Mathematics

Probability

Scientific paper

In a recent article the authors obtained a formula which relates explicitly the tail of risk neutral returns with the wing behavior of the Black Scholes implied volatility smile. In situations where precise tail asymptotics are unknown but a moment generating function is available we first establish, under easy-to-check conditions, tail asymptoics on logarithmic scale as soft applications of standard Tauberian theorems. Such asymptotics are enough to make the tail-wing formula work and we so obtain a version of Lee's moment formula with the novel guarantee that there is indeed a limiting slope when plotting implied variance against log-strike. We apply these results to time-changed Levy models and the Heston model. In particular, the term-structure of the wings can be analytically understood.

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