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Smiling under stochastic volatility

Author

Listed:
  • León, Angel
  • Rubio Irigoyen, Gonzalo

Abstract

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.

Suggested Citation

  • León, Angel & Rubio Irigoyen, Gonzalo, 2002. "Smiling under stochastic volatility," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    • Handle: RePEc:ehu:dfaeii:6755
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