Author : Ruoting Gong
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (825 download)
Book Synopsis Small-time Asymptotics and Expansions of Option Prices Under Levy-based Models by : Ruoting Gong
Download or read book Small-time Asymptotics and Expansions of Option Prices Under Levy-based Models written by Ruoting Gong and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 asymptotoc 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 fisk asset with a jump diffusion model by combining a stochastic volatility model with an independent pure-jump Levy process. By assuming smoothness 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 a consequence of our tail expansions, the polynomial expansion in t of the transition density 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 novel second-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 as well as the asymptotic behavior of the corresponding Black-Scholes implied volatilities are also addressed.