Stochastic volatility’s orderly smiles

Lorenzo Bergomi and Julien Guyon derive an expansion of the volatility surface of general stochastic volatility models at second order in volatility of volatility that is accurate for a wide range of strikes. They characterise the shape of stochastic volatility smiles in terms of three effective quantities that compactly summarise the joint dynamics of spot and volatilities in the model

cutting-edge-pic-1

Stochastic volatility models generate an implied volatility surface as well as its associated dynamics. While Monte Carlo simulation is always an option, a fast and accurate approximation of the volatility surface is a useful implement for assessing any given model. In this article, we obtain such an approximation at second order in the volatility of volatility for a general class of stochastic volatility models.

Stochastic volatility's orderly smiles

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here