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Skewed Lévy Models And Implied Volatility Skew

Author

Listed:
  • FEDERICO DE OLIVERA

    (Departamento de Matemática, Centro Regional de Profesores del Sur, Consejo de Formación en Educación, Atlántida, Uruguay)

  • JOSÉ FAJARDO

    (Brazilian School of Public and Business Administration, Getulio Vargas Foundation, Rio de Janeiro, Brazil)

  • ERNESTO MORDECKI

    (Centro de Matemática, Facultad de Ciencias, Universidad de la República, Montevideo, Uruguay)

Abstract

We introduce skewed Lévy models, characterized by a symmetric jump measure multiplied by a damping exponential factor. These models exhibit a clear implied volatility pattern, where the damping parameter controls the implied volatility curve’s skew, resulting in a measure of the model’s skewness. We show that the variation of this parameter produces the typical smirk observed in implied volatility curves. Some theoretical facts supporting these findings are proved.

Suggested Citation

  • Federico De Olivera & José Fajardo & Ernesto Mordecki, 2018. "Skewed Lévy Models And Implied Volatility Skew," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-16, March.
    • Handle: RePEc:wsi:ijtafx:v:21:y:2018:i:02:n:s0219024918500036
    DOI: 10.1142/S0219024918500036
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    References listed on IDEAS

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