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Smiling under stochastic volatility

Author

Listed:
  • Ángel León

    ()

  • Gonzalo Rubio

    ()

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 Heston’s stochastic volatility model for a given degree of moneyness are given. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Ángel León & Gonzalo Rubio, 2004. "Smiling under stochastic volatility," Spanish Economic Review, Springer;Spanish Economic Association, vol. 6(1), pages 53-75, April.
  • Handle: RePEc:spr:specre:v:6:y:2004:i:1:p:53-75
    DOI: 10.1007/s10108-003-0077-8
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