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Small time central limit theorems for semimartingales with applications

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Listed:
  • Stefan Gerhold
  • Max Kleinert
  • Piet Porkert
  • Mykhaylo Shkolnikov

Abstract

We give conditions under which the normalized marginal distribution of a semimartingale converges to a Gaussian limit law as time tends to zero. In particular, our result is applicable to solutions of stochastic differential equations with locally bounded and continuous coefficients. The limit theorems are subsequently extended to functional central limit theorems on the process level. We present two applications of the results in the field of mathematical finance: to the pricing of at-the-money digital options with short maturities and short time implied volatility skews.

Suggested Citation

  • Stefan Gerhold & Max Kleinert & Piet Porkert & Mykhaylo Shkolnikov, 2012. "Small time central limit theorems for semimartingales with applications," Papers 1208.4282, arXiv.org.
  • Handle: RePEc:arx:papers:1208.4282
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    File URL: http://arxiv.org/pdf/1208.4282
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    References listed on IDEAS

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    1. H. Berestycki & J. Busca & I. Florent, 2002. "Asymptotics and calibration of local volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 61-69.
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