Small-time asymptotics and expansions of option prices under Levy-based modelsReport as inadecuate

Small-time asymptotics and expansions of option prices under Levy-based models

Small-time asymptotics and expansions of option prices under Levy-based models - Download this document for free, or read online. Document in PDF available to download.

This thesis is concerned with the small-time asymptotics and expansions of call option prices, when the log-return processes of the underlying stock prices follow several Levy-based models. To be specific, we derive the time-to-maturity asymptotic behavior for both at-the-money ATM, out-of-the-money OTM and in-the-money ITM call-option prices under several jump-diffusion models and stochastic volatility models with Levy jumps. In the OTM and ITM cases, we consider a general stochastic volatility model with independent Levy jumps, while in the ATM case, we consider the pure-jump CGMY model with or without an independent Brownian component. An accurate modeling of the option market and asset prices requires a mixture of a continuous diffusive component and a jump component. In this thesis, we first model the log-return process of a risk asset with a jump diffusion model by combining a stochastic volatility model with an independent pure-jump Levy process. By assumingsmoothness conditions on the Levy density away from the origin and a small-time large deviation principle on the stochastic volatility model, we derive the small-time expansions, of arbitrary polynomial order, in time-t, for the tail distribution of the log-return process, and for the call-option price which is not at-the-money. Moreover, our approach allows for a unified treatment of more general payoff functions. As aconsequence of our tail expansions, the polynomial expansion in t of the transitiondensity is also obtained under mild conditions.The asymptotic behavior of the ATM call-option prices is more complicated to obtain, and, in general, is given by fractional powers of t, which depends on different choices of the underlying log-return models. Here, we focus on the CGMY model, one of the most popular tempered stable models used in financial modeling. A novelsecond-order approximation for ATM option prices under the pure-jump CGMY Levy model is derived, and then extended to a model with an additional independent Brownian component. The third-order asymptotic behavior of the ATM option prices aswell as the asymptotic behavior of the corresponding Black-Scholes implied volatilitiesare also addressed.

Georgia Tech Theses and Dissertations - School of Mathematics Theses and Dissertations -

Author: Gong, Ruoting - -


Related documents