Smile Dynamics I

14 Pages Posted: 24 Oct 2009  

Lorenzo Bergomi

Societe Generale

Date Written: April 1, 2004

Abstract

Traditionally smile models have been assessed according to how well they fit market option prices across strikes and maturities. However, the pricing of most of the recent exotic structures, such as reverse cliquets or Napoleons, is more dependent on the assumptions made for the future dynamics of implied vols than on today’s vanilla option prices. In this article we study examples of some popular classes of models, such as stochastic volatility and Jump/Lévy models, to highlight structural features of their dynamic properties.

JEL Classification: G13

Suggested Citation

Bergomi, Lorenzo, Smile Dynamics I (April 1, 2004). Available at SSRN: https://ssrn.com/abstract=1493294 or http://dx.doi.org/10.2139/ssrn.1493294

Lorenzo Bergomi (Contact Author)

Societe Generale ( email )

Paris-La Défense, Paris 92987
France

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