Title:
Small-time asymptotics and expansions of option prices under Levy-based models
Small-time asymptotics and expansions of option prices under Levy-based models
Author(s)
Gong, Ruoting
Advisor(s)
Houdré, Christian
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Abstract
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 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.
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Date Issued
2012-06-12
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Resource Subtype
Dissertation