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Asymptotics of forward implied volatility

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  • Antoine Jacquier
  • Patrick Roome

Abstract

We prove here a general closed-form expansion formula for forward-start options and the forward implied volatility smile in a large class of models, including the Heston stochastic volatility and time-changed exponential L\'evy models. This expansion applies to both small and large maturities and is based solely on the properties of the forward characteristic function of the underlying process. The method is based on sharp large deviations techniques, and allows us to recover (in particular) many results for the spot implied volatility smile. In passing we (i) show that the forward-start date has to be rescaled in order to obtain non-trivial small-maturity asymptotics, (ii) prove that the forward-start date may influence the large-maturity behaviour of the forward smile, and (iii) provide some examples of models with finite quadratic variation where the small-maturity forward smile does not explode.

Suggested Citation

  • Antoine Jacquier & Patrick Roome, 2012. "Asymptotics of forward implied volatility," Papers 1212.0779, arXiv.org, revised Feb 2015.
    • Handle: RePEc:arx:papers:1212.0779
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    Citations

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    Cited by:

    1. Elisa Alos & Antoine Jacquier & Jorge Leon, 2017. "The implied volatility of Forward-Start options: ATM short-time level, skew and curvature," Papers 1710.11232, arXiv.org.
    2. Luciano Campi & Ismail Laachir & Claude Martini, 2017. "Change of numeraire in the two-marginals martingale transport problem," Finance and Stochastics, Springer, vol. 21(2), pages 471-486, April.
    3. Jacquier, Antoine & Roome, Patrick, 2016. "Large-maturity regimes of the Heston forward smile," Stochastic Processes and their Applications, Elsevier, vol. 126(4), pages 1087-1123.
    4. Damir Filipovic & Damien Ackerer & Sergio Pulido, 2018. "The Jacobi Stochastic Volatility Model," Post-Print hal-01338330, HAL.
    5. Antoine Jacquier & Patrick Roome, 2015. "Black-Scholes in a CEV random environment," Papers 1503.08082, arXiv.org, revised Nov 2017.
    6. Damien Ackerer & Damir Filipovic & Sergio Pulido, 2017. "The Jacobi Stochastic Volatility Model," Working Papers hal-01338330, HAL.
    7. Damien Ackerer & Damir Filipovi'c & Sergio Pulido, 2016. "The Jacobi Stochastic Volatility Model," Papers 1605.07099, arXiv.org, revised Mar 2018.
    8. Dan Pirjol & Jing Wang & Lingjiong Zhu, 2017. "Short Maturity Forward Start Asian Options in Local Volatility Models," Papers 1710.03160, arXiv.org.
    9. Antoine Jacquier & Mikko S. Pakkanen & Henry Stone, 2017. "Pathwise large deviations for the Rough Bergomi model," Papers 1706.05291, arXiv.org, revised Dec 2018.
    10. Elisa Alòs & Antoine Jacquier & Jorge A. León, 2017. "The Implied Volatility of Forward Starting Options: ATM Short-Time Level, Skew and Curvature," Working Papers 988, Barcelona School of Economics.
    11. Antoine Jacquier & Fangwei Shi, 2016. "The randomised Heston model," Papers 1608.07158, arXiv.org, revised Dec 2018.
    12. Li, Xingyi & Zakamulin, Valeriy, 2020. "The term structure of volatility predictability," International Journal of Forecasting, Elsevier, vol. 36(2), pages 723-737.
    13. Damien Ackerer & Damir Filipović & Sergio Pulido, 2018. "The Jacobi stochastic volatility model," Finance and Stochastics, Springer, vol. 22(3), pages 667-700, July.

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