IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v05y2002i04ns0219024902001511.html
   My bibliography  Save this article

Lognormal-Mixture Dynamics And Calibration To Market Volatility Smiles

Author

Listed:
  • DAMIANO BRIGO

    (Product and Business Development Group, Banca IMI, San Paolo-IMI Group, Corso Matteotti, 6, 20121 Milano, Italy)

  • FABIO MERCURIO

    (Product and Business Development Group, Banca IMI, San Paolo-IMI Group, Corso Matteotti, 6, 20121 Milano, Italy)

Abstract

We introduce a general class of analytically tractable models for the dynamics of an asset price based on the assumption that the asset-price density is given by the mixture of known basic densities. We consider the lognormal-mixture model as a fundamental example, deriving explicit dynamics, closed form formulas for option prices and analytical approximations for the implied volatility function. We then introduce the asset-price model that is obtained by shifting the previous lognormal-mixture dynamics and investigate its analytical tractability. We finally consider a specific example of calibration to real market option data.

Suggested Citation

  • Damiano Brigo & Fabio Mercurio, 2002. "Lognormal-Mixture Dynamics And Calibration To Market Volatility Smiles," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 427-446.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:04:n:s0219024902001511
    DOI: 10.1142/S0219024902001511
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024902001511
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024902001511?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:05:y:2002:i:04:n:s0219024902001511. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.