arXiv q-fin· \`Oscar Bur\'es, Josep Vives·· 2 days agoAI Score33
Power-Law Relationship Between Skew and Curvature in Stochastic Volatility Models with Infinite Variation Lévy Jumps
On the skew-curvature power law relationship in a stochastic volatility model with infinite variation L\'evy jumps
AI summary
This paper focuses on the impact of hybrid dynamics (rough volatility and infinite variation Lévy processes) on the implied volatility skew and curvature of at-the-money options. By analyzing the leading terms of their short-time expansions, the origin mechanism of the power-law behavior of skew and curvature can be determined from the hybrid dynamics model. The paper confirms that hybrid models also produce power-law relationships, and the relevant conclusions are crucial for model design and calibration. Numerical evidence for the rough Heston model with CGMY Lévy jumps is also provided.
Source:arXiv q-fin · arxiv.org