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A note on essential smoothness in the Heston model

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  • Martin Forde
  • Antoine Jacquier
  • Aleksandar Mijatovic

Abstract

This note studies an issue relating to essential smoothness that can arise when the theory of large deviations is applied to a certain option pricing formula in the Heston model. The note identifies a gap, based on this issue, in the proof of Corollary 2.4 in \cite{FordeJacquier10} and describes how to circumvent it. This completes the proof of Corollary 2.4 in \cite{FordeJacquier10} and hence of the main result in \cite{FordeJacquier10}, which describes the limiting behaviour of the implied volatility smile in the Heston model far from maturity.

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File URL: http://arxiv.org/pdf/1107.4881
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Paper provided by arXiv.org in its series Papers with number 1107.4881.

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Date of creation: Jul 2011
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Handle: RePEc:arx:papers:1107.4881

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